Changchun BCHT Biotechnology (SHSE:688276) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Changchun BCHT Biotechnology Co. (SHSE:688276) does carry debt. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Changchun BCHT Biotechnology

What Is Changchun BCHT Biotechnology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Changchun BCHT Biotechnology had CN¥62.6m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥277.9m in cash, so it actually has CN¥215.3m net cash.

A Look At Changchun BCHT Biotechnology's Liabilities

Zooming in on the latest balance sheet data, we can see that Changchun BCHT Biotechnology had liabilities of CN¥1.07b due within 12 months and liabilities of CN¥47.1m due beyond that. Offsetting this, it had CN¥277.9m in cash and CN¥1.67b in receivables that were due within 12 months. So it can boast CN¥836.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Changchun BCHT Biotechnology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Changchun BCHT Biotechnology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Changchun BCHT Biotechnology has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Changchun BCHT Biotechnology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Changchun BCHT Biotechnology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Changchun BCHT Biotechnology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Changchun BCHT Biotechnology has CN¥215.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 42% over the last year. So we don't have any problem with Changchun BCHT Biotechnology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 Changchun BCHT Biotechnology .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.