Is Changchun BCHT Biotechnology (SHSE:688276) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Changchun BCHT Biotechnology Co. (SHSE:688276) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Changchun BCHT Biotechnology

What Is Changchun BCHT Biotechnology's Net Debt?

As you can see below, at the end of March 2024, Changchun BCHT Biotechnology had CN¥65.4m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥392.5m in cash to offset that, meaning it has CN¥327.1m 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¥1.00b due within 12 months and liabilities of CN¥10.7m due beyond that. On the other hand, it had cash of CN¥392.5m and CN¥1.59b worth of receivables due within a year. So it can boast CN¥970.3m 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. Succinctly put, Changchun BCHT Biotechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Changchun BCHT Biotechnology grew its EBIT by 265% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Changchun BCHT Biotechnology 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.

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. Over the last three years, Changchun BCHT Biotechnology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Changchun BCHT Biotechnology has CN¥327.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 265% over the last year. So we don't have any problem with Changchun BCHT Biotechnology's use of debt. 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. For instance, we've identified 1 warning sign for Changchun BCHT Biotechnology that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com