Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Suzhou Zelgen Biopharmaceuticals Co.,Ltd. (SHSE:688266) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Suzhou Zelgen BiopharmaceuticalsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Suzhou Zelgen BiopharmaceuticalsLtd had CN¥967.3m of debt, an increase on CN¥621.7m, over one year. But it also has CN¥2.41b in cash to offset that, meaning it has CN¥1.45b net cash.

A Look At Suzhou Zelgen BiopharmaceuticalsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Suzhou Zelgen BiopharmaceuticalsLtd had liabilities of CN¥1.21b due within 12 months and liabilities of CN¥295.8m due beyond that. Offsetting this, it had CN¥2.41b in cash and CN¥122.3m in receivables that were due within 12 months. So it actually has CN¥1.03b more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Zelgen BiopharmaceuticalsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Suzhou Zelgen BiopharmaceuticalsLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Suzhou Zelgen BiopharmaceuticalsLtd 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 Suzhou Zelgen BiopharmaceuticalsLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 5.4%, to CN¥387m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Suzhou Zelgen BiopharmaceuticalsLtd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Suzhou Zelgen BiopharmaceuticalsLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥186m and booked a CN¥261m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.45b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Suzhou Zelgen BiopharmaceuticalsLtd 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 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.

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