Is Getein Biotech (SHSE:603387) 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.' 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. We can see that Getein Biotech, Inc (SHSE:603387) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Getein Biotech

What Is Getein Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Getein Biotech had CN¥627.4m of debt in June 2024, down from CN¥668.1m, one year before. However, it does have CN¥994.4m in cash offsetting this, leading to net cash of CN¥367.0m.

How Healthy Is Getein Biotech's Balance Sheet?

According to the last reported balance sheet, Getein Biotech had liabilities of CN¥1.01b due within 12 months, and liabilities of CN¥48.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥994.4m as well as receivables valued at CN¥455.0m due within 12 months. So it can boast CN¥388.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Getein Biotech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Getein Biotech boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Getein Biotech if management cannot prevent a repeat of the 30% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Getein Biotech's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Getein Biotech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Getein Biotech produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Getein Biotech has net cash of CN¥367.0m, as well as more liquid assets than liabilities. So we are not troubled with Getein Biotech's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Getein Biotech is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.