Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Berry Genomics Co.,Ltd (SZSE:000710) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

How Much Debt Does Berry GenomicsLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Berry GenomicsLtd had debt of CN¥337.8m, up from CN¥267.1m in one year. On the flip side, it has CN¥291.2m in cash leading to net debt of about CN¥46.7m.

How Healthy Is Berry GenomicsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Berry GenomicsLtd had liabilities of CN¥749.6m due within 12 months and liabilities of CN¥141.3m due beyond that. Offsetting these obligations, it had cash of CN¥291.2m as well as receivables valued at CN¥1.08b due within 12 months. So it can boast CN¥477.3m more liquid assets than total liabilities.

This surplus suggests that Berry GenomicsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Berry GenomicsLtd has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is Berry GenomicsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Berry GenomicsLtd had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥1.2b. That's not what we would hope to see.

Caveat Emptor

Not only did Berry GenomicsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥237m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. 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. To that end, you should learn about the 2 warning signs we've spotted with Berry GenomicsLtd (including 1 which is a bit unpleasant) .

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.