Mabwell (Shanghai) Bioscience (SHSE:688062) Has Debt But No Earnings; Should You Worry?

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, Mabwell (Shanghai) Bioscience Co., Ltd. (SHSE:688062) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Mabwell (Shanghai) Bioscience had CN¥1.74b of debt, an increase on CN¥806.5m, over one year. However, it does have CN¥1.80b in cash offsetting this, leading to net cash of CN¥59.0m.

A Look At Mabwell (Shanghai) Bioscience's Liabilities

Zooming in on the latest balance sheet data, we can see that Mabwell (Shanghai) Bioscience had liabilities of CN¥1.05b due within 12 months and liabilities of CN¥1.19b due beyond that. Offsetting these obligations, it had cash of CN¥1.80b as well as receivables valued at CN¥142.7m due within 12 months. So its liabilities total CN¥305.2m more than the combination of its cash and short-term receivables.

Given Mabwell (Shanghai) Bioscience has a market capitalization of CN¥9.31b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Mabwell (Shanghai) Bioscience boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mabwell (Shanghai) Bioscience can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Mabwell (Shanghai) Bioscience wasn't profitable at an EBIT level, but managed to grow its revenue by 591%, to CN¥191m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Mabwell (Shanghai) Bioscience?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Mabwell (Shanghai) Bioscience had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥1.3b of cash and made a loss of CN¥1.0b. But at least it has CN¥59.0m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Mabwell (Shanghai) Bioscience has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Mabwell (Shanghai) Bioscience is showing 2 warning signs in our investment analysis , you should know about...

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.