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.' 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. Importantly, Nanjing Vazyme Biotech Co.,Ltd (SHSE:688105) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Nanjing Vazyme BiotechLtd's Net Debt?
As you can see below, Nanjing Vazyme BiotechLtd had CN¥884.7m of debt at March 2024, down from CN¥1.01b a year prior. However, its balance sheet shows it holds CN¥3.04b in cash, so it actually has CN¥2.16b net cash.
How Healthy Is Nanjing Vazyme BiotechLtd's Balance Sheet?
We can see from the most recent balance sheet that Nanjing Vazyme BiotechLtd had liabilities of CN¥1.18b falling due within a year, and liabilities of CN¥234.8m due beyond that. Offsetting these obligations, it had cash of CN¥3.04b as well as receivables valued at CN¥407.4m due within 12 months. So it can boast CN¥2.04b more liquid assets than total liabilities.
It's good to see that Nanjing Vazyme BiotechLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Nanjing Vazyme BiotechLtd 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 Nanjing Vazyme BiotechLtd'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 Nanjing Vazyme BiotechLtd had a loss before interest and tax, and actually shrunk its revenue by 56%, to CN¥1.3b. That makes us nervous, to say the least.
So How Risky Is Nanjing Vazyme BiotechLtd?
Although Nanjing Vazyme BiotechLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥12m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Nanjing Vazyme BiotechLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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