Health Check: How Prudently Does Keymed Biosciences (HKG:2162) Use Debt?

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 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 Keymed Biosciences Inc. (HKG:2162) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Keymed Biosciences

What Is Keymed Biosciences's Debt?

As you can see below, at the end of June 2024, Keymed Biosciences had CN¥719.5m of debt, up from CN¥282.9m a year ago. Click the image for more detail. But on the other hand it also has CN¥2.58b in cash, leading to a CN¥1.86b net cash position.

How Strong Is Keymed Biosciences' Balance Sheet?

We can see from the most recent balance sheet that Keymed Biosciences had liabilities of CN¥559.7m falling due within a year, and liabilities of CN¥608.6m due beyond that. Offsetting this, it had CN¥2.58b in cash and CN¥40.8m in receivables that were due within 12 months. So it can boast CN¥1.45b more liquid assets than total liabilities.

This short term liquidity is a sign that Keymed Biosciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Keymed 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 ultimately the future profitability of the business will decide if Keymed 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.

In the last year Keymed Biosciences had a loss before interest and tax, and actually shrunk its revenue by 75%, to CN¥82m. To be frank that doesn't bode well.

So How Risky Is Keymed Biosciences?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Keymed Biosciences had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥900m of cash and made a loss of CN¥743m. But the saving grace is the CN¥1.86b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. 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. Be aware that Keymed 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.