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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Chongqing Genrix Biopharmaceutical Co., Ltd. (SHSE:688443) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is Chongqing Genrix Biopharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that Chongqing Genrix Biopharmaceutical had debt of CN¥609.1m at the end of March 2024, a reduction from CN¥808.9m over a year. However, it does have CN¥2.76b in cash offsetting this, leading to net cash of CN¥2.15b.

A Look At Chongqing Genrix Biopharmaceutical's Liabilities

Zooming in on the latest balance sheet data, we can see that Chongqing Genrix Biopharmaceutical had liabilities of CN¥120.1m due within 12 months and liabilities of CN¥672.6m due beyond that. On the other hand, it had cash of CN¥2.76b and CN¥3.14m worth of receivables due within a year. So it actually has CN¥1.97b more liquid assets than total liabilities.

It's good to see that Chongqing Genrix Biopharmaceutical has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Chongqing Genrix Biopharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Chongqing Genrix Biopharmaceutical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Chongqing Genrix Biopharmaceutical reported revenue of CN¥1.1m, which is a gain of 96%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Chongqing Genrix Biopharmaceutical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Chongqing Genrix Biopharmaceutical had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥484m and booked a CN¥764m accounting loss. But the saving grace is the CN¥2.15b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Chongqing Genrix Biopharmaceutical's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Chongqing Genrix Biopharmaceutical (including 1 which can't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.