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 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 Keymed Biosciences Inc. (HKG:2162) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Keymed Biosciences's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Keymed Biosciences had CN¥436.9m of debt, an increase on CN¥90.2m, over one year. But on the other hand it also has CN¥2.72b in cash, leading to a CN¥2.28b net cash position.

How Strong Is Keymed Biosciences' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Keymed Biosciences had liabilities of CN¥314.2m due within 12 months and liabilities of CN¥581.9m due beyond that. Offsetting this, it had CN¥2.72b in cash and CN¥46.5m in receivables that were due within 12 months. So it can boast CN¥1.87b more liquid assets than total liabilities.

It's good to see that Keymed Biosciences 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, Keymed Biosciences 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 Keymed Biosciences 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.

In the last year Keymed Biosciences wasn't profitable at an EBIT level, but managed to grow its revenue by 254%, to CN¥354m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Keymed Biosciences?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Keymed Biosciences had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥635m of cash and made a loss of CN¥359m. But the saving grace is the CN¥2.28b on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, Keymed Biosciences's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 2 warning signs we've spotted with Keymed Biosciences (including 1 which is a bit concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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