The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, COFCO Biotechnology Co., Ltd. (SZSE:000930) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 COFCO Biotechnology Carry?

You can click the graphic below for the historical numbers, but it shows that COFCO Biotechnology had CN¥4.95b of debt in March 2024, down from CN¥6.14b, one year before. However, because it has a cash reserve of CN¥1.27b, its net debt is less, at about CN¥3.69b.

How Healthy Is COFCO Biotechnology's Balance Sheet?

According to the last reported balance sheet, COFCO Biotechnology had liabilities of CN¥6.73b due within 12 months, and liabilities of CN¥510.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.27b as well as receivables valued at CN¥1.03b due within 12 months. So it has liabilities totalling CN¥4.94b more than its cash and near-term receivables, combined.

COFCO Biotechnology has a market capitalization of CN¥9.38b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if COFCO Biotechnology can strengthen its balance sheet over time. 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 COFCO Biotechnology wasn't profitable at an EBIT level, but managed to grow its revenue by 8.0%, to CN¥21b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, COFCO Biotechnology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥328m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥578m into a profit. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how COFCO Biotechnology's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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