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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Genscript Biotech Corporation (HKG:1548) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Genscript Biotech

What Is Genscript Biotech's Debt?

As you can see below, at the end of December 2023, Genscript Biotech had US$769.7m of debt, up from US$600.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.93b in cash, so it actually has US$1.16b net cash.

How Healthy Is Genscript Biotech's Balance Sheet?

We can see from the most recent balance sheet that Genscript Biotech had liabilities of US$494.8m falling due within a year, and liabilities of US$848.1m due beyond that. On the other hand, it had cash of US$1.93b and US$217.4m worth of receivables due within a year. So it can boast US$802.5m more liquid assets than total liabilities.

This excess liquidity suggests that Genscript Biotech is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Genscript Biotech 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 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.

Over 12 months, Genscript Biotech reported revenue of US$840m, which is a gain of 34%, 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?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Genscript Biotech had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$543m and booked a US$95m accounting loss. But the saving grace is the US$1.16b on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Genscript Biotech may be on a path to profitability. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.