We Think Shenzhen Chipscreen Biosciences (SHSE:688321) Has A Fair Chunk Of 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shenzhen Chipscreen Biosciences Co., Ltd. (SHSE:688321) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen Chipscreen Biosciences

What Is Shenzhen Chipscreen Biosciences's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Chipscreen Biosciences had CN¥1.12b of debt, an increase on CN¥837.7m, over one year. On the flip side, it has CN¥620.1m in cash leading to net debt of about CN¥495.4m.

How Healthy Is Shenzhen Chipscreen Biosciences' Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Chipscreen Biosciences had liabilities of CN¥352.4m falling due within a year, and liabilities of CN¥1.17b due beyond that. Offsetting this, it had CN¥620.1m in cash and CN¥156.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥747.5m more than its cash and near-term receivables, combined.

Given Shenzhen Chipscreen Biosciences has a market capitalization of CN¥8.49b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Chipscreen Biosciences'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.

Over 12 months, Shenzhen Chipscreen Biosciences reported revenue of CN¥548m, which is a gain of 3.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Shenzhen Chipscreen Biosciences had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥169m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥293m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shenzhen Chipscreen Biosciences that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.