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 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 Chongqing Genrix Biopharmaceutical Co., Ltd. (SHSE:688443) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Chongqing Genrix Biopharmaceutical Carry?

You can click the graphic below for the historical numbers, but it shows that Chongqing Genrix Biopharmaceutical had CN¥620.6m of debt in March 2024, down from CN¥808.9m, one year before. But it also has CN¥2.76b in cash to offset that, meaning it has CN¥2.14b net cash.

How Healthy Is Chongqing Genrix Biopharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Chongqing Genrix Biopharmaceutical had liabilities of CN¥120.1m falling due within a year, and liabilities of CN¥672.6m due beyond that. Offsetting this, it had CN¥2.76b in cash and CN¥3.14m in receivables that were due within 12 months. So it can boast CN¥1.97b more liquid assets than total liabilities.

This short term liquidity is a sign that Chongqing Genrix Biopharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Chongqing Genrix Biopharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chongqing Genrix Biopharmaceutical'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 Chongqing Genrix Biopharmaceutical managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Chongqing Genrix Biopharmaceutical?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Chongqing Genrix Biopharmaceutical lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥484m and booked a CN¥764m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥2.14b. 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. By investing before those profits, shareholders take on more risk in the hope of bigger 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. For instance, we've identified 2 warning signs for Chongqing Genrix Biopharmaceutical (1 can't be ignored) you should be aware of.

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.