Bloomage BioTechnology (SHSE:688363) Seems To Use Debt Quite Sensibly

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 Bloomage BioTechnology Corporation Limited (SHSE:688363) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Bloomage BioTechnology

What Is Bloomage BioTechnology's Debt?

You can click the graphic below for the historical numbers, but it shows that Bloomage BioTechnology had CN¥40.6m of debt in March 2024, down from CN¥302.8m, one year before. However, its balance sheet shows it holds CN¥836.1m in cash, so it actually has CN¥795.6m net cash.

A Look At Bloomage BioTechnology's Liabilities

According to the last reported balance sheet, Bloomage BioTechnology had liabilities of CN¥902.6m due within 12 months, and liabilities of CN¥285.4m due beyond 12 months. Offsetting this, it had CN¥836.1m in cash and CN¥636.1m in receivables that were due within 12 months. So it actually has CN¥284.2m more liquid assets than total liabilities.

This state of affairs indicates that Bloomage BioTechnology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥28.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Bloomage BioTechnology has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Bloomage BioTechnology if management cannot prevent a repeat of the 33% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bloomage 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Bloomage 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. In the last three years, Bloomage BioTechnology created free cash flow amounting to 3.1% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Bloomage BioTechnology has CN¥795.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Bloomage BioTechnology's use of debt. 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. Case in point: We've spotted 2 warning signs for Bloomage BioTechnology 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.

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

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.