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. As with many other companies BeiGene, Ltd. (NASDAQ:BGNE) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is BeiGene's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 BeiGene had debt of US$1.03b, up from US$488.1m in one year. But on the other hand it also has US$2.79b in cash, leading to a US$1.77b net cash position.

How Strong Is BeiGene's Balance Sheet?

According to the last reported balance sheet, BeiGene had liabilities of US$1.88b due within 12 months, and liabilities of US$425.6m due beyond 12 months. Offsetting these obligations, it had cash of US$2.79b as well as receivables valued at US$467.1m due within 12 months. So it can boast US$953.2m more liquid assets than total liabilities.

This short term liquidity is a sign that BeiGene could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that BeiGene has more cash than debt is arguably a good indication that it can manage its debt safely. 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 BeiGene 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 BeiGene wasn't profitable at an EBIT level, but managed to grow its revenue by 77%, to US$2.8b. With any luck the company will be able to grow its way to profitability.

So How Risky Is BeiGene?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year BeiGene had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$1.6b and booked a US$784m accounting loss. But at least it has US$1.77b on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, BeiGene may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - BeiGene has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.