Is Shanghai Junshi Biosciences (HKG:1877) A Risky Investment?

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. We note that Shanghai Junshi Biosciences Co., Ltd. (HKG:1877) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 September 2023 Shanghai Junshi Biosciences had debt of CN¥1.49b, up from CN¥1.31b in one year. However, its balance sheet shows it holds CN¥4.17b in cash, so it actually has CN¥2.68b net cash.

How Healthy Is Shanghai Junshi Biosciences' Balance Sheet?

According to the last reported balance sheet, Shanghai Junshi Biosciences had liabilities of CN¥1.85b due within 12 months, and liabilities of CN¥1.40b due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.17b as well as receivables valued at CN¥457.9m due within 12 months. So it actually has CN¥1.38b 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 52%, to CN¥1.2b. To be frank that doesn't bode well.

So How Risky Is Shanghai Junshi Biosciences?

Statistically speaking companies that lose money are riskier than those that make money. 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¥2.2b accounting loss. With only CN¥2.68b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shanghai Junshi Biosciences is showing 1 warning sign in our investment analysis , you should know about...

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.