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 Zhejiang Orient Gene Biotech Co.,Ltd (SHSE:688298) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Zhejiang Orient Gene BiotechLtd Carry?
You can click the graphic below for the historical numbers, but it shows that Zhejiang Orient Gene BiotechLtd had CN¥176.8m of debt in March 2024, down from CN¥593.5m, one year before. However, it does have CN¥4.50b in cash offsetting this, leading to net cash of CN¥4.32b.
How Strong Is Zhejiang Orient Gene BiotechLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Zhejiang Orient Gene BiotechLtd had liabilities of CN¥1.15b due within 12 months and liabilities of CN¥77.2m due beyond that. Offsetting these obligations, it had cash of CN¥4.50b as well as receivables valued at CN¥253.3m due within 12 months. So it actually has CN¥3.53b more liquid assets than total liabilities.
This surplus liquidity suggests that Zhejiang Orient Gene BiotechLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Zhejiang Orient Gene BiotechLtd 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 it is Zhejiang Orient Gene BiotechLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Zhejiang Orient Gene BiotechLtd had a loss before interest and tax, and actually shrunk its revenue by 86%, to CN¥627m. That makes us nervous, to say the least.
So How Risky Is Zhejiang Orient Gene BiotechLtd?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Zhejiang Orient Gene BiotechLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥2.1b and booked a CN¥415m accounting loss. However, it has net cash of CN¥4.32b, so it has a bit of time before it will need more capital. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Zhejiang Orient Gene BiotechLtd 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.