TECON BIOLOGYLTD (SZSE:002100) Is Carrying A Fair Bit Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that TECON BIOLOGY Co.LTD (SZSE:002100) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for TECON BIOLOGYLTD

What Is TECON BIOLOGYLTD's Net Debt?

As you can see below, TECON BIOLOGYLTD had CN¥5.78b of debt at June 2024, down from CN¥6.66b a year prior. However, because it has a cash reserve of CN¥2.86b, its net debt is less, at about CN¥2.91b.

How Strong Is TECON BIOLOGYLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TECON BIOLOGYLTD had liabilities of CN¥6.36b due within 12 months and liabilities of CN¥2.14b due beyond that. Offsetting these obligations, it had cash of CN¥2.86b as well as receivables valued at CN¥1.11b due within 12 months. So its liabilities total CN¥4.53b more than the combination of its cash and short-term receivables.

TECON BIOLOGYLTD has a market capitalization of CN¥8.33b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TECON BIOLOGYLTD's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, TECON BIOLOGYLTD saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months TECON BIOLOGYLTD produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥559m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥81m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like TECON BIOLOGYLTD I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.