Is Genscript Biotech (HKG:1548) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Genscript Biotech Corporation (HKG:1548) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Genscript Biotech

How Much Debt Does Genscript Biotech Carry?

As you can see below, at the end of December 2022, Genscript Biotech had US$600.9m of debt, up from US$382.4m a year ago. Click the image for more detail. But on the other hand it also has US$1.46b in cash, leading to a US$862.4m net cash position.

How Healthy Is Genscript Biotech's Balance Sheet?

We can see from the most recent balance sheet that Genscript Biotech had liabilities of US$546.0m falling due within a year, and liabilities of US$637.7m due beyond that. On the other hand, it had cash of US$1.46b and US$104.1m worth of receivables due within a year. So it can boast US$383.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Genscript Biotech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Genscript Biotech 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 ultimately the future profitability of the business will decide if Genscript Biotech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Genscript Biotech reported revenue of US$626m, which is a gain of 22%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Genscript Biotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Genscript Biotech lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$339m and booked a US$227m accounting loss. With only US$862.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Genscript Biotech's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Genscript Biotech that you should be aware of.

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.