Here's Why Bio-Thera Solutions (SHSE:688177) Can Afford Some 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.' 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. Importantly, Bio-Thera Solutions, Ltd. (SHSE:688177) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Bio-Thera Solutions Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Bio-Thera Solutions had debt of CN¥702.0m, up from CN¥479.4m in one year. On the flip side, it has CN¥451.1m in cash leading to net debt of about CN¥250.9m.

How Healthy Is Bio-Thera Solutions' Balance Sheet?

According to the last reported balance sheet, Bio-Thera Solutions had liabilities of CN¥1.08b due within 12 months, and liabilities of CN¥410.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥451.1m as well as receivables valued at CN¥148.0m due within 12 months. So its liabilities total CN¥891.7m more than the combination of its cash and short-term receivables.

Given Bio-Thera Solutions has a market capitalization of CN¥8.01b, 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. 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 Bio-Thera Solutions 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.

View our latest analysis for Bio-Thera Solutions

In the last year Bio-Thera Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 5.4%, to CN¥743m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Bio-Thera Solutions had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥509m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥317m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Bio-Thera Solutions .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.