Health Check: How Prudently Does Shanghai Junshi Biosciences (HKG:1877) Use Debt?

Warren Buffett famously said, '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 Shanghai Junshi Biosciences Co., Ltd. (HKG:1877) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai Junshi Biosciences

What Is Shanghai Junshi Biosciences's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Shanghai Junshi Biosciences had debt of CN¥1.33b, up from CN¥915.7m in one year. But on the other hand it also has CN¥4.88b in cash, leading to a CN¥3.55b net cash position.

How Strong Is Shanghai Junshi Biosciences' Balance Sheet?

The latest balance sheet data shows that Shanghai Junshi Biosciences had liabilities of CN¥1.84b due within a year, and liabilities of CN¥1.16b falling due after that. On the other hand, it had cash of CN¥4.88b and CN¥535.0m worth of receivables due within a year. So it actually has CN¥2.42b more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Junshi Biosciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai Junshi Biosciences has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai Junshi Biosciences's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shanghai Junshi Biosciences had a loss before interest and tax, and actually shrunk its revenue by 59%, to CN¥1.2b. To be frank that doesn't bode well.

So How Risky Is Shanghai Junshi Biosciences?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Shanghai Junshi Biosciences 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 CN¥3.0b and booked a CN¥2.5b accounting loss. With only CN¥3.55b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shanghai Junshi Biosciences is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.