David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Frontier Biotechnologies Inc. (SHSE:688221) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Frontier Biotechnologies Carry?

As you can see below, at the end of September 2024, Frontier Biotechnologies had CN¥448.6m of debt, up from CN¥353.9m a year ago. Click the image for more detail. However, it does have CN¥662.5m in cash offsetting this, leading to net cash of CN¥213.8m.

A Look At Frontier Biotechnologies' Liabilities

According to the last reported balance sheet, Frontier Biotechnologies had liabilities of CN¥476.2m due within 12 months, and liabilities of CN¥380.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥662.5m as well as receivables valued at CN¥49.5m due within 12 months. So its liabilities total CN¥144.4m more than the combination of its cash and short-term receivables.

Given Frontier Biotechnologies has a market capitalization of CN¥3.64b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Frontier Biotechnologies also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Frontier Biotechnologies will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Frontier Biotechnologies reported revenue of CN¥134m, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Frontier Biotechnologies?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Frontier Biotechnologies 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¥249m and booked a CN¥280m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥213.8m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Frontier Biotechnologies may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Frontier Biotechnologies is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.