Is Mabwell (Shanghai) Bioscience (SHSE:688062) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Mabwell (Shanghai) Bioscience Co., Ltd. (SHSE:688062) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 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 Mabwell (Shanghai) Bioscience

What Is Mabwell (Shanghai) Bioscience's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Mabwell (Shanghai) Bioscience had CN¥2.03b of debt, an increase on CN¥997.8m, over one year. However, because it has a cash reserve of CN¥1.59b, its net debt is less, at about CN¥449.7m.

How Strong Is Mabwell (Shanghai) Bioscience's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mabwell (Shanghai) Bioscience had liabilities of CN¥1.44b due within 12 months and liabilities of CN¥1.15b due beyond that. Offsetting these obligations, it had cash of CN¥1.59b as well as receivables valued at CN¥70.0m due within 12 months. So its liabilities total CN¥937.3m more than the combination of its cash and short-term receivables.

Since publicly traded Mabwell (Shanghai) Bioscience shares are worth a total of CN¥6.73b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mabwell (Shanghai) Bioscience'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.

Over 12 months, Mabwell (Shanghai) Bioscience reported revenue of CN¥169m, which is a gain of 59%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Mabwell (Shanghai) Bioscience still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥1.1b 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥1.2b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with Mabwell (Shanghai) Bioscience .

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.