Does Jiangsu Recbio Technology (HKG:2179) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jiangsu Recbio Technology Co., Ltd. (HKG:2179) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangsu Recbio Technology

How Much Debt Does Jiangsu Recbio Technology Carry?

As you can see below, at the end of December 2023, Jiangsu Recbio Technology had CN¥631.6m of debt, up from CN¥233.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥835.0m in cash, so it actually has CN¥203.3m net cash.

How Healthy Is Jiangsu Recbio Technology's Balance Sheet?

According to the last reported balance sheet, Jiangsu Recbio Technology had liabilities of CN¥444.2m due within 12 months, and liabilities of CN¥671.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥835.0m as well as receivables valued at CN¥12.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥267.8m.

Given Jiangsu Recbio Technology has a market capitalization of CN¥3.92b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Jiangsu Recbio Technology also has more cash than debt, so we're pretty confident 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 Jiangsu Recbio Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Given its lack of meaningful operating revenue, Jiangsu Recbio Technology shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Jiangsu Recbio Technology?

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 Jiangsu Recbio Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥901m of cash and made a loss of CN¥572m. With only CN¥203.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 4 warning signs with Jiangsu Recbio Technology (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.