COFCO Biotechnology (SZSE:000930) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, COFCO Biotechnology Co., Ltd. (SZSE:000930) does carry debt. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for COFCO Biotechnology

What Is COFCO Biotechnology's Debt?

The image below, which you can click on for greater detail, shows that COFCO Biotechnology had debt of CN¥4.95b at the end of March 2024, a reduction from CN¥6.14b over a year. However, because it has a cash reserve of CN¥1.27b, its net debt is less, at about CN¥3.69b.

How Strong Is COFCO Biotechnology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that COFCO Biotechnology had liabilities of CN¥6.73b due within 12 months and liabilities of CN¥510.4m due beyond that. On the other hand, it had cash of CN¥1.27b and CN¥1.03b worth of receivables due within a year. So it has liabilities totalling CN¥4.94b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since COFCO Biotechnology has a market capitalization of CN¥11.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 COFCO 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.

Over 12 months, COFCO Biotechnology reported revenue of CN¥21b, which is a gain of 8.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, COFCO Biotechnology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥328m 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. For example, we would not want to see a repeat of last year's loss of CN¥578m. In the meantime, we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how COFCO Biotechnology's profit, revenue, and operating cashflow have changed over the last few years.

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.