Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Bio-Thera Solutions, Ltd. (SHSE:688177) makes use of debt. But should shareholders be worried about its use of debt?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Bio-Thera Solutions's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 Bio-Thera Solutions had CN¥702.0m of debt, an increase on CN¥458.9m, over one year. On the flip side, it has CN¥451.1m in cash leading to net debt of about CN¥250.9m.
How Strong Is Bio-Thera Solutions' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Bio-Thera Solutions had liabilities of CN¥1.08b due within 12 months and liabilities of CN¥410.8m due beyond that. Offsetting this, it had CN¥451.1m in cash and CN¥148.0m in receivables that were due within 12 months. So its liabilities total CN¥891.7m more than the combination of its cash and short-term receivables.
Given Bio-Thera Solutions has a market capitalization of CN¥8.61b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bio-Thera Solutions's ability to maintain a healthy balance sheet going forward. 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 Bio-Thera Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to CN¥825m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, Bio-Thera Solutions still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥471m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥317m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 instance, we've identified 1 warning sign for Bio-Thera Solutions that you should be aware of.
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.
