Is Shanghai Junshi Biosciences (HKG:1877) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shanghai Junshi Biosciences Co., Ltd. (HKG:1877) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shanghai Junshi Biosciences

What Is Shanghai Junshi Biosciences's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Shanghai Junshi Biosciences had debt of CN¥1.51b, up from CN¥1.23b in one year. However, it does have CN¥4.17b in cash offsetting this, leading to net cash of CN¥2.65b.

A Look At Shanghai Junshi Biosciences' Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai Junshi Biosciences had liabilities of CN¥1.85b due within 12 months and liabilities of CN¥1.40b due beyond that. On the other hand, it had cash of CN¥4.17b and CN¥457.9m worth of receivables due within a year. So it can boast 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. Succinctly put, Shanghai Junshi Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shanghai Junshi Biosciences 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, Shanghai Junshi Biosciences reported revenue of CN¥1.5b, which is a gain of 6.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Shanghai Junshi Biosciences?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Shanghai Junshi Biosciences had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥3.0b of cash and made a loss of CN¥2.2b. But at least it has CN¥2.65b on the balance sheet to spend on growth, near-term. 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. For instance, we've identified 1 warning sign for Shanghai Junshi Biosciences that you should be aware of.

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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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.