Is Suzhou Zelgen BiopharmaceuticalsLtd (SHSE:688266) Using Debt Sensibly?

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. We note that Suzhou Zelgen Biopharmaceuticals Co.,Ltd. (SHSE:688266) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Suzhou Zelgen BiopharmaceuticalsLtd

What Is Suzhou Zelgen BiopharmaceuticalsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Suzhou Zelgen BiopharmaceuticalsLtd had CN¥893.5m of debt, an increase on CN¥822.7m, over one year. However, its balance sheet shows it holds CN¥2.20b in cash, so it actually has CN¥1.31b net cash.

How Strong Is Suzhou Zelgen BiopharmaceuticalsLtd's Balance Sheet?

We can see from the most recent balance sheet that Suzhou Zelgen BiopharmaceuticalsLtd had liabilities of CN¥1.31b falling due within a year, and liabilities of CN¥350.7m due beyond that. On the other hand, it had cash of CN¥2.20b and CN¥142.2m worth of receivables due within a year. So it can boast CN¥681.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Zelgen BiopharmaceuticalsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Suzhou Zelgen BiopharmaceuticalsLtd 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 Suzhou Zelgen BiopharmaceuticalsLtd 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.

Over 12 months, Suzhou Zelgen BiopharmaceuticalsLtd reported revenue of CN¥488m, which is a gain of 26%, 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.

So How Risky Is Suzhou Zelgen BiopharmaceuticalsLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Suzhou Zelgen BiopharmaceuticalsLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥22m of cash and made a loss of CN¥174m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.31b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Suzhou Zelgen BiopharmaceuticalsLtd may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Suzhou Zelgen BiopharmaceuticalsLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.