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 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. We note that Bio-Thera Solutions, Ltd. (SHSE:688177) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Bio-Thera Solutions's Debt?
As you can see below, at the end of June 2024, Bio-Thera Solutions had CN¥686.1m of debt, up from CN¥277.9m a year ago. Click the image for more detail. On the flip side, it has CN¥488.7m in cash leading to net debt of about CN¥197.5m.
How Healthy Is Bio-Thera Solutions' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Bio-Thera Solutions had liabilities of CN¥990.6m due within 12 months and liabilities of CN¥384.2m due beyond that. Offsetting these obligations, it had cash of CN¥488.7m as well as receivables valued at CN¥161.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥724.2m.
Since publicly traded Bio-Thera Solutions shares are worth a total of CN¥7.74b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Bio-Thera Solutions'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, Bio-Thera Solutions reported revenue of CN¥792m, 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.
Caveat Emptor
While we can certainly appreciate Bio-Thera Solutions's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥473m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥520m of cash over the last year. So suffice it to say we consider the stock very risky. 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, we've discovered 2 warning signs for Bio-Thera Solutions 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.
