Does Genscript Biotech (HKG:1548) Have A Healthy Balance Sheet?

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. As with many other companies Genscript Biotech Corporation (HKG:1548) makes use of debt. But should shareholders be worried about its use of debt?

We check all companies for important risks. See what we found for Genscript Biotech in our free report.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Genscript Biotech's Net Debt?

The image below, which you can click on for greater detail, shows that Genscript Biotech had debt of US$659.2m at the end of December 2024, a reduction from US$769.7m over a year. On the flip side, it has US$621.2m in cash leading to net debt of about US$38.0m.

A Look At Genscript Biotech's Liabilities

According to the last reported balance sheet, Genscript Biotech had liabilities of US$307.3m due within 12 months, and liabilities of US$647.6m due beyond 12 months. Offsetting these obligations, it had cash of US$621.2m as well as receivables valued at US$136.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$197.5m.

Since publicly traded Genscript Biotech shares are worth a total of US$2.93b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Genscript Biotech has virtually no net debt, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Genscript Biotech

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Genscript Biotech has a low debt to EBITDA ratio of only 0.54. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. The modesty of its debt load may become crucial for Genscript Biotech if management cannot prevent a repeat of the 65% 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 ultimately the future profitability of the business will decide if Genscript Biotech can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last two years, Genscript Biotech burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Genscript Biotech's EBIT growth rate and conversion of EBIT to free cash flow definitely weigh on it, in our esteem. But its interest cover tells a very different story, and suggests some resilience. Taking the abovementioned factors together we do think Genscript Biotech's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. In light of our reservations about the company's balance sheet, it seems sensible to check if insiders have been selling shares recently.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.