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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Alphamab Oncology (HKG:9966) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Alphamab Oncology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Alphamab Oncology had CN¥320.0m of debt, an increase on CN¥270.0m, over one year. However, it does have CN¥1.46b in cash offsetting this, leading to net cash of CN¥1.14b.

How Healthy Is Alphamab Oncology's Balance Sheet?

According to the last reported balance sheet, Alphamab Oncology had liabilities of CN¥345.4m due within 12 months, and liabilities of CN¥167.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.46b as well as receivables valued at CN¥71.1m due within 12 months. So it can boast CN¥1.01b more liquid assets than total liabilities.

It's good to see that Alphamab Oncology 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, Alphamab Oncology 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 Alphamab Oncology 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 Alphamab Oncology wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to CN¥256m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Alphamab Oncology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Alphamab Oncology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥194m of cash and made a loss of CN¥216m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.14b. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Alphamab Oncology you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.