David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Zai Lab Limited (NASDAQ:ZLAB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Zai Lab Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Zai Lab had debt of US$48.3m, up from none in one year. But on the other hand it also has US$650.8m in cash, leading to a US$602.5m net cash position.

How Strong Is Zai Lab's Balance Sheet?

According to the last reported balance sheet, Zai Lab had liabilities of US$192.1m due within 12 months, and liabilities of US$34.2m due beyond 12 months. Offsetting these obligations, it had cash of US$650.8m as well as receivables valued at US$75.8m due within 12 months. So it actually has US$500.3m more liquid assets than total liabilities.

This surplus suggests that Zai Lab is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Zai Lab 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 Zai Lab'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.

Over 12 months, Zai Lab reported revenue of US$291m, which is a gain of 26%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Zai Lab?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Zai Lab lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$223m of cash and made a loss of US$339m. While this does make the company a bit risky, it's important to remember it has net cash of US$602.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Zai Lab may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Zai Lab that you should be aware of before investing here.

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