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.' 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. As with many other companies CanSino Biologics Inc. (HKG:6185) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is CanSino Biologics's Net Debt?

As you can see below, CanSino Biologics had CN¥1.68b of debt at June 2024, down from CN¥2.17b a year prior. However, its balance sheet shows it holds CN¥3.54b in cash, so it actually has CN¥1.86b net cash.

A Look At CanSino Biologics' Liabilities

Zooming in on the latest balance sheet data, we can see that CanSino Biologics had liabilities of CN¥1.89b due within 12 months and liabilities of CN¥1.19b due beyond that. On the other hand, it had cash of CN¥3.54b and CN¥586.9m worth of receivables due within a year. So it actually has CN¥1.05b more liquid assets than total liabilities.

This surplus suggests that CanSino Biologics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CanSino Biologics 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 future earnings, more than anything, that will determine CanSino Biologics's ability to maintain a healthy balance sheet going forward. 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, CanSino Biologics reported revenue of CN¥635m, which is a gain of 47%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is CanSino Biologics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CanSino Biologics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥940m of cash and made a loss of CN¥867m. But the saving grace is the CN¥1.86b on the balance sheet. 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, CanSino Biologics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like CanSino Biologics I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.