Is Zhejiang Orient Gene BiotechLtd (SHSE:688298) A Risky Investment?

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.' 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, Zhejiang Orient Gene Biotech Co.,Ltd (SHSE:688298) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhejiang Orient Gene BiotechLtd

What Is Zhejiang Orient Gene BiotechLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Zhejiang Orient Gene BiotechLtd had CN¥564.4m of debt, an increase on CN¥50.0m, over one year. However, it does have CN¥5.22b in cash offsetting this, leading to net cash of CN¥4.65b.

How Strong Is Zhejiang Orient Gene BiotechLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Orient Gene BiotechLtd had liabilities of CN¥1.09b due within 12 months and liabilities of CN¥360.4m due beyond that. On the other hand, it had cash of CN¥5.22b and CN¥228.4m worth of receivables due within a year. So it can boast CN¥4.00b more liquid assets than total liabilities.

This excess liquidity is a great indication that Zhejiang Orient Gene BiotechLtd's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Zhejiang Orient Gene BiotechLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhejiang Orient Gene BiotechLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Zhejiang Orient Gene BiotechLtd made a loss at the EBIT level, and saw its revenue drop to CN¥820m, which is a fall of 91%. That makes us nervous, to say the least.

So How Risky Is Zhejiang Orient Gene BiotechLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Zhejiang Orient Gene BiotechLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥2.6b of cash and made a loss of CN¥398m. With only CN¥4.65b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Zhejiang Orient Gene BiotechLtd 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.