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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Shanghai Junshi Biosciences Co., Ltd. (HKG:1877) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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

How Much Debt Does Shanghai Junshi Biosciences Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Shanghai Junshi Biosciences had debt of CN¥2.54b, up from CN¥1.33b in one year. However, its balance sheet shows it holds CN¥3.31b in cash, so it actually has CN¥771.2m net cash.

How Healthy Is Shanghai Junshi Biosciences' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Junshi Biosciences had liabilities of CN¥2.29b due within 12 months and liabilities of CN¥2.10b due beyond that. Offsetting these obligations, it had cash of CN¥3.31b as well as receivables valued at CN¥651.7m due within 12 months. So its liabilities total CN¥421.0m more than the combination of its cash and short-term receivables.

Having regard to Shanghai Junshi Biosciences' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥23.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Shanghai Junshi Biosciences 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 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¥1.6b, which is a gain of 38%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Shanghai Junshi Biosciences?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Shanghai Junshi Biosciences had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥2.7b and booked a CN¥1.9b accounting loss. However, it has net cash of CN¥771.2m, so it has a bit of time before it will need more capital. Shanghai Junshi Biosciences'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. For example, we've discovered 1 warning sign for Shanghai Junshi Biosciences that you should be aware of before investing here.

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.