Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Bloomage BioTechnology Corporation Limited (SHSE:688363) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Bloomage BioTechnology's Debt?

You can click the graphic below for the historical numbers, but it shows that Bloomage BioTechnology had CN¥127.0m of debt in September 2024, down from CN¥137.3m, one year before. However, it does have CN¥541.6m in cash offsetting this, leading to net cash of CN¥414.6m.

How Strong Is Bloomage BioTechnology's Balance Sheet?

We can see from the most recent balance sheet that Bloomage BioTechnology had liabilities of CN¥1.14b falling due within a year, and liabilities of CN¥498.5m due beyond that. Offsetting this, it had CN¥541.6m in cash and CN¥586.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥507.1m more than its cash and near-term receivables, combined.

Having regard to Bloomage BioTechnology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥28.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Bloomage BioTechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Bloomage BioTechnology's saving grace is its low debt levels, because its EBIT has tanked 43% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bloomage BioTechnology'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bloomage BioTechnology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Bloomage BioTechnology actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

We could understand if investors are concerned about Bloomage BioTechnology's liabilities, but we can be reassured by the fact it has has net cash of CN¥414.6m. So while Bloomage BioTechnology does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Bloomage BioTechnology you should know about.

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.

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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.