COFCO Biotechnology (SZSE:000930) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that COFCO Biotechnology Co., Ltd. (SZSE:000930) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for COFCO Biotechnology

How Much Debt Does COFCO Biotechnology Carry?

You can click the graphic below for the historical numbers, but it shows that COFCO Biotechnology had CN¥3.86b of debt in September 2024, down from CN¥4.11b, one year before. However, it does have CN¥1.67b in cash offsetting this, leading to net debt of about CN¥2.19b.

How Strong Is COFCO Biotechnology's Balance Sheet?

We can see from the most recent balance sheet that COFCO Biotechnology had liabilities of CN¥5.66b falling due within a year, and liabilities of CN¥618.2m due beyond that. On the other hand, it had cash of CN¥1.67b and CN¥1.68b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.93b.

This deficit isn't so bad because COFCO Biotechnology is worth CN¥9.95b, and thus could probably raise enough capital to shore up 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 ultimately the future profitability of the business will decide if COFCO Biotechnology can strengthen its balance sheet over time. 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 5.3%, 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

Over the last twelve months COFCO Biotechnology produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥171m. 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¥259m. So we do think this stock is quite 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.

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.