Is Genscript Biotech (HKG:1548) 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.' 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Genscript Biotech

What Is Genscript Biotech's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Genscript Biotech had debt of US$806.4m, up from US$468.1m in one year. But on the other hand it also has US$2.14b in cash, leading to a US$1.34b 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$437.9m falling due within a year, and liabilities of US$860.4m due beyond that. Offsetting this, it had US$2.14b in cash and US$208.0m in receivables that were due within 12 months. So it can boast US$1.05b more liquid assets than total liabilities.

It's good to see that Genscript Biotech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Genscript Biotech has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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$707m, which is a gain of 21%, 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 we do note that Genscript Biotech had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$339m of cash and made a loss of US$185m. Given it only has net cash of US$1.34b, the company may need to raise more capital if it doesn't reach break-even 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. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Genscript Biotech 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.