Shanghai Junshi Biosciences (HKG:1877) Has Debt But No Earnings; Should You Worry?

By
Simply Wall St
Published
June 06, 2021
SEHK:1877
Source: Shutterstock

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Shanghai Junshi Biosciences Co., Ltd. (HKG:1877) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Shanghai Junshi Biosciences had debt of CN¥795.1m at the end of March 2021, a reduction from CN¥863.0m over a year. However, its balance sheet shows it holds CN¥3.28b in cash, so it actually has CN¥2.49b net cash.

debt-equity-history-analysis
SEHK:1877 Debt to Equity History June 7th 2021

A Look At Shanghai Junshi Biosciences' Liabilities

The latest balance sheet data shows that Shanghai Junshi Biosciences had liabilities of CN¥1.57b due within a year, and liabilities of CN¥720.0m falling due after that. On the other hand, it had cash of CN¥3.28b and CN¥883.2m worth of receivables due within a year. So it can boast CN¥1.87b 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. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Shanghai Junshi Biosciences reported revenue of CN¥3.0b, which is a gain of 250%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Shanghai Junshi Biosciences?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Shanghai Junshi Biosciences lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥1.4b and booked a CN¥1.1b accounting loss. Given it only has net cash of CN¥2.49b, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Shanghai Junshi Biosciences has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shanghai Junshi Biosciences 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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