Is Guangdong Hybribio BiotechLtd (SZSE:300639) Using Debt In A Risky Way?

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.' 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 can see that Guangdong Hybribio Biotech Co.,Ltd. (SZSE:300639) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Guangdong Hybribio BiotechLtd

What Is Guangdong Hybribio BiotechLtd's Debt?

As you can see below, Guangdong Hybribio BiotechLtd had CN¥53.3m of debt at June 2024, down from CN¥110.1m a year prior. But on the other hand it also has CN¥869.6m in cash, leading to a CN¥816.3m net cash position.

A Look At Guangdong Hybribio BiotechLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Guangdong Hybribio BiotechLtd had liabilities of CN¥388.0m due within 12 months and liabilities of CN¥138.2m due beyond that. Offsetting this, it had CN¥869.6m in cash and CN¥1.76b in receivables that were due within 12 months. So it actually has CN¥2.11b more liquid assets than total liabilities.

This surplus liquidity suggests that Guangdong Hybribio BiotechLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Guangdong Hybribio 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 Guangdong Hybribio 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.

In the last year Guangdong Hybribio BiotechLtd had a loss before interest and tax, and actually shrunk its revenue by 73%, to CN¥907m. That makes us nervous, to say the least.

So How Risky Is Guangdong Hybribio 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 Guangdong Hybribio BiotechLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥22m and booked a CN¥59m accounting loss. With only CN¥816.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Guangdong Hybribio 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.

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.