Is Shenzhen Bioeasy Biotechnology (SZSE:300942) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Shenzhen Bioeasy Biotechnology Co., Ltd. (SZSE:300942) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Shenzhen Bioeasy Biotechnology

What Is Shenzhen Bioeasy Biotechnology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shenzhen Bioeasy Biotechnology had CN¥409.6m of debt, an increase on CN¥360.2m, over one year. However, it does have CN¥582.0m in cash offsetting this, leading to net cash of CN¥172.4m.

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How Strong Is Shenzhen Bioeasy Biotechnology's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Bioeasy Biotechnology had liabilities of CN¥141.7m falling due within a year, and liabilities of CN¥383.3m due beyond that. Offsetting these obligations, it had cash of CN¥582.0m as well as receivables valued at CN¥93.3m due within 12 months. So it actually has CN¥150.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Bioeasy Biotechnology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Bioeasy Biotechnology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen Bioeasy Biotechnology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shenzhen Bioeasy Biotechnology had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥247m. We would much prefer see growth.

So How Risky Is Shenzhen Bioeasy Biotechnology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Shenzhen Bioeasy Biotechnology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥110m of cash and made a loss of CN¥82m. But the saving grace is the CN¥172.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenzhen Bioeasy Biotechnology you should know about.

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.