Is Genscript Biotech (HKG:1548) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Genscript Biotech Corporation (HKG:1548) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 2020, Genscript Biotech had US$45.9m of debt, up from US$18.8m a year ago. Click the image for more detail. But on the other hand it also has US$771.2m in cash, leading to a US$725.3m net cash position.

A Look At Genscript Biotech's Liabilities

Zooming in on the latest balance sheet data, we can see that Genscript Biotech had liabilities of US$327.9m due within 12 months and liabilities of US$303.9m due beyond that. Offsetting these obligations, it had cash of US$771.2m as well as receivables valued at US$165.7m due within 12 months. So it can boast US$305.1m 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. Succinctly put, Genscript Biotech boasts net cash, so it's fair to say it does not have a heavy debt load! 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$391m, which is a gain of 43%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

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. Indeed, in that time it burnt through US$279m of cash and made a loss of US$205m. With only US$725.3m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Genscript Biotech may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Genscript Biotech .

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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