3D Medicines (HKG:1244) Has Debt But No Earnings; Should You Worry?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that 3D Medicines Inc. (HKG:1244) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does 3D Medicines Carry?

You can click the graphic below for the historical numbers, but it shows that 3D Medicines had CN¥221.1m of debt in December 2024, down from CN¥230.6m, one year before. However, it does have CN¥841.0m in cash offsetting this, leading to net cash of CN¥619.9m.

A Look At 3D Medicines' Liabilities

Zooming in on the latest balance sheet data, we can see that 3D Medicines had liabilities of CN¥487.8m due within 12 months and liabilities of CN¥24.8m due beyond that. Offsetting these obligations, it had cash of CN¥841.0m as well as receivables valued at CN¥127.1m due within 12 months. So it actually has CN¥455.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that 3D Medicines' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, 3D Medicines boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is 3D Medicines'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.

View our latest analysis for 3D Medicines

Over 12 months, 3D Medicines made a loss at the EBIT level, and saw its revenue drop to CN¥446m, which is a fall of 30%. That makes us nervous, to say the least.

So How Risky Is 3D Medicines?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months 3D Medicines lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥256m of cash and made a loss of CN¥183m. But the saving grace is the CN¥619.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. For riskier companies like 3D Medicines I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.