Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Nanjing Vazyme Biotech Co., Ltd (SHSE:688105) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Nanjing Vazyme Biotech's Debt?

As you can see below, Nanjing Vazyme Biotech had CN¥510.8m of debt at June 2024, down from CN¥1.15b a year prior. But it also has CN¥2.58b in cash to offset that, meaning it has CN¥2.07b net cash.

A Look At Nanjing Vazyme Biotech's Liabilities

The latest balance sheet data shows that Nanjing Vazyme Biotech had liabilities of CN¥763.4m due within a year, and liabilities of CN¥240.0m falling due after that. On the other hand, it had cash of CN¥2.58b and CN¥483.1m worth of receivables due within a year. So it actually has CN¥2.06b more liquid assets than total liabilities.

This excess liquidity suggests that Nanjing Vazyme Biotech is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Nanjing Vazyme Biotech 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 Nanjing Vazyme Biotech 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.

Over 12 months, Nanjing Vazyme Biotech made a loss at the EBIT level, and saw its revenue drop to CN¥1.4b, which is a fall of 46%. That makes us nervous, to say the least.

So How Risky Is Nanjing Vazyme Biotech?

While Nanjing Vazyme Biotech lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥26m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 instance, we've identified 1 warning sign for Nanjing Vazyme Biotech that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.