The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that Suzhou Zelgen Biopharmaceuticals Co.,Ltd. (SHSE:688266) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Suzhou Zelgen BiopharmaceuticalsLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Suzhou Zelgen BiopharmaceuticalsLtd had debt of CN¥914.2m, up from CN¥709.3m in one year. But it also has CN¥2.38b in cash to offset that, meaning it has CN¥1.46b net cash.

How Healthy Is Suzhou Zelgen BiopharmaceuticalsLtd's Balance Sheet?

We can see from the most recent balance sheet that Suzhou Zelgen BiopharmaceuticalsLtd had liabilities of CN¥1.17b falling due within a year, and liabilities of CN¥362.2m due beyond that. Offsetting these obligations, it had cash of CN¥2.38b as well as receivables valued at CN¥140.2m due within 12 months. So it can boast CN¥985.5m more liquid assets than total liabilities.

This surplus suggests that Suzhou Zelgen BiopharmaceuticalsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Suzhou Zelgen BiopharmaceuticalsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Suzhou Zelgen BiopharmaceuticalsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Suzhou Zelgen BiopharmaceuticalsLtd had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to CN¥407m. That's not what we would hope to see.

So How Risky Is Suzhou Zelgen BiopharmaceuticalsLtd?

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 Suzhou Zelgen BiopharmaceuticalsLtd 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¥69m and booked a CN¥231m accounting loss. But the saving grace is the CN¥1.46b on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Suzhou Zelgen BiopharmaceuticalsLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.