Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Mabwell (Shanghai) Bioscience Co., Ltd. (SHSE:688062) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mabwell (Shanghai) Bioscience

How Much Debt Does Mabwell (Shanghai) Bioscience Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Mabwell (Shanghai) Bioscience had debt of CN¥997.8m, up from CN¥461.5m in one year. However, its balance sheet shows it holds CN¥1.81b in cash, so it actually has CN¥808.1m net cash.

A Look At Mabwell (Shanghai) Bioscience's Liabilities

Zooming in on the latest balance sheet data, we can see that Mabwell (Shanghai) Bioscience had liabilities of CN¥511.5m due within 12 months and liabilities of CN¥1.02b due beyond that. On the other hand, it had cash of CN¥1.81b and CN¥44.9m worth of receivables due within a year. So it can boast CN¥314.5m more liquid assets than total liabilities.

This surplus suggests that Mabwell (Shanghai) Bioscience has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Mabwell (Shanghai) Bioscience boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mabwell (Shanghai) Bioscience can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Mabwell (Shanghai) Bioscience wasn't profitable at an EBIT level, but managed to grow its revenue by 312%, to CN¥107m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Mabwell (Shanghai) Bioscience?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Mabwell (Shanghai) Bioscience had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥1.4b and booked a CN¥936m accounting loss. But at least it has CN¥808.1m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Mabwell (Shanghai) Bioscience has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Mabwell (Shanghai) Bioscience , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.