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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Genscript Biotech Corporation (HKG:1548) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Genscript Biotech

What Is Genscript Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Genscript Biotech had US$877.2m of debt, an increase on US$806.4m, over one year. But on the other hand it also has US$1.88b in cash, leading to a US$1.00b net cash position.

A Look At Genscript Biotech's Liabilities

According to the last reported balance sheet, Genscript Biotech had liabilities of US$533.0m due within 12 months, and liabilities of US$974.7m due beyond 12 months. On the other hand, it had cash of US$1.88b and US$234.5m worth of receivables due within a year. So it actually has US$605.9m 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. 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 it is future earnings, more than anything, that will determine Genscript Biotech's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Genscript Biotech wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to US$1.0b. 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 we do note that Genscript Biotech had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$276m and booked a US$177m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$1.00b. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Genscript Biotech .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.