Is BGI Genomics (SZSE:300676) 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 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 BGI Genomics Co., Ltd. (SZSE:300676) makes use of debt. But is this debt a concern to shareholders?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for BGI Genomics

What Is BGI Genomics's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 BGI Genomics had debt of CN¥242.1m, up from none in one year. But on the other hand it also has CN¥5.26b in cash, leading to a CN¥5.02b net cash position.

How Strong Is BGI Genomics' Balance Sheet?

We can see from the most recent balance sheet that BGI Genomics had liabilities of CN¥3.08b falling due within a year, and liabilities of CN¥328.8m due beyond that. Offsetting these obligations, it had cash of CN¥5.26b as well as receivables valued at CN¥1.63b due within 12 months. So it actually has CN¥3.48b more liquid assets than total liabilities.

This excess liquidity suggests that BGI Genomics is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, BGI Genomics boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact BGI Genomics's saving grace is its low debt levels, because its EBIT has tanked 81% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is BGI Genomics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. BGI Genomics 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. Considering the last three years, BGI Genomics actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case BGI Genomics has CN¥5.02b in net cash and a decent-looking balance sheet. So we don't have any problem with BGI Genomics's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for BGI Genomics (1 is a bit concerning!) that you should be aware of before investing here.

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.

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