Is Genscript Biotech (HKG:1548) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that 1548 is potentially undervalued!

What Is Genscript Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Genscript Biotech had US$468.1m of debt, an increase on US$38.8m, over one year. However, it does have US$1.26b in cash offsetting this, leading to net cash of US$787.5m.

How Healthy Is Genscript Biotech's Balance Sheet?

According to the last reported balance sheet, Genscript Biotech had liabilities of US$512.8m due within 12 months, and liabilities of US$743.1m due beyond 12 months. On the other hand, it had cash of US$1.26b and US$102.5m worth of receivables due within a year. So it can boast US$102.2m more liquid assets than total liabilities.

Having regard to Genscript Biotech's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$5.23b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Genscript Biotech has more cash than debt is arguably a good indication that it can manage its debt safely. 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 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$586m, which is a gain of 29%, 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 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$311m of cash and made a loss of US$388m. Given it only has net cash of US$787.5m, the company may need to raise more capital if it doesn't reach break-even soon. 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.

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.