Here's Why Bloomage BioTechnology (SHSE:688363) Has A Meaningful Debt Burden

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.' 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. Importantly, Bloomage BioTechnology Corporation Limited (SHSE:688363) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bloomage BioTechnology

What Is Bloomage BioTechnology's Net Debt?

The image below, which you can click on for greater detail, shows that Bloomage BioTechnology had debt of CN¥127.0m at the end of September 2024, a reduction from CN¥137.3m over a year. But it also has CN¥541.6m in cash to offset that, meaning it has CN¥414.6m net cash.

How Strong Is Bloomage BioTechnology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bloomage BioTechnology had liabilities of CN¥1.14b due within 12 months 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¥25.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Bloomage BioTechnology also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Bloomage BioTechnology if management cannot prevent a repeat of the 43% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Bloomage BioTechnology'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Bloomage BioTechnology has CN¥414.6m in net cash. So although we see some areas for improvement, we're not too worried about Bloomage BioTechnology's balance sheet. 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. To that end, you should be aware of the 2 warning signs we've spotted with Bloomage BioTechnology .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.