We Think Bio-Thera Solutions (SHSE:688177) Has A Fair Chunk Of Debt

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 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. As with many other companies Bio-Thera Solutions, Ltd. (SHSE:688177) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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.

Check out our latest analysis for Bio-Thera Solutions

What Is Bio-Thera Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Bio-Thera Solutions had CN¥702.0m of debt, an increase on CN¥458.9m, over one year. However, it does have CN¥451.1m in cash offsetting this, leading to net debt of about CN¥250.9m.

A Look At Bio-Thera Solutions' Liabilities

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 outweigh the sum of its cash and (near-term) receivables by CN¥891.7m.

Of course, Bio-Thera Solutions has a market capitalization of CN¥8.68b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bio-Thera Solutions'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.

In the last year Bio-Thera Solutions wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to CN¥825m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Bio-Thera Solutions still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥471m. 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. However, it doesn't help that it burned through CN¥317m of cash over the last year. So to be blunt we think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Bio-Thera Solutions you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.