Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mabwell (Shanghai) Bioscience Co., Ltd. (SHSE:688062) does use debt in its business. But is this debt a concern to shareholders?

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

How Much Debt Does Mabwell (Shanghai) Bioscience Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Mabwell (Shanghai) Bioscience had CN¥1.74b of debt, an increase on CN¥806.5m, over one year. However, it does have CN¥1.80b in cash offsetting this, leading to net cash of CN¥59.0m.

A Look At Mabwell (Shanghai) Bioscience's Liabilities

We can see from the most recent balance sheet that Mabwell (Shanghai) Bioscience had liabilities of CN¥1.05b falling due within a year, and liabilities of CN¥1.19b due beyond that. Offsetting this, it had CN¥1.80b in cash and CN¥142.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥305.2m.

Since publicly traded Mabwell (Shanghai) Bioscience shares are worth a total of CN¥11.3b, it seems unlikely that this level of liabilities would be a major 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, Mabwell (Shanghai) Bioscience also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Mabwell (Shanghai) Bioscience 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 Mabwell (Shanghai) Bioscience wasn't profitable at an EBIT level, but managed to grow its revenue by 591%, to CN¥191m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Mabwell (Shanghai) Bioscience?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Mabwell (Shanghai) Bioscience 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¥1.3b and booked a CN¥1.0b accounting loss. However, it has net cash of CN¥59.0m, so it has a bit of time before it will need more capital. The good news for shareholders is that Mabwell (Shanghai) Bioscience has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Mabwell (Shanghai) Bioscience that you should be aware of before investing here.

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.

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