Is Chengdu Olymvax Biopharmaceuticals (SHSE:688319) Using Too Much 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.' 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. We note that Chengdu Olymvax Biopharmaceuticals Inc. (SHSE:688319) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Chengdu Olymvax Biopharmaceuticals

What Is Chengdu Olymvax Biopharmaceuticals's Net Debt?

As you can see below, at the end of September 2024, Chengdu Olymvax Biopharmaceuticals had CN¥377.4m of debt, up from CN¥177.6m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥269.5m, its net debt is less, at about CN¥107.9m.

How Strong Is Chengdu Olymvax Biopharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Chengdu Olymvax Biopharmaceuticals had liabilities of CN¥483.8m due within a year, and liabilities of CN¥302.8m falling due after that. On the other hand, it had cash of CN¥269.5m and CN¥531.6m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Chengdu Olymvax Biopharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.03b company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Chengdu Olymvax Biopharmaceuticals'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 Chengdu Olymvax Biopharmaceuticals's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Chengdu Olymvax Biopharmaceuticals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥16m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Chengdu Olymvax Biopharmaceuticals's profit, revenue, and operating cashflow have changed over the last few years.

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.