Jiangsu Recbio Technology (HKG:2179) Is Making Moderate Use Of Debt

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 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. 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jiangsu Recbio Technology

What Is Jiangsu Recbio Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Jiangsu Recbio Technology had debt of CN¥681.3m, up from CN¥509.2m in one year. On the flip side, it has CN¥531.3m in cash leading to net debt of about CN¥150.0m.

A Look At Jiangsu Recbio Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Recbio Technology had liabilities of CN¥681.6m due within 12 months and liabilities of CN¥541.3m due beyond that. Offsetting this, it had CN¥531.3m in cash and CN¥38.6m in receivables that were due within 12 months. So its liabilities total CN¥653.1m more than the combination of its cash and short-term receivables.

Since publicly traded Jiangsu Recbio Technology shares are worth a total of CN¥3.70b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Recbio Technology 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.

Since Jiangsu Recbio Technology doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

Caveat Emptor

Over the last twelve months Jiangsu Recbio Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥535m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥862m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Jiangsu Recbio Technology has 3 warning signs (and 1 which is concerning) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.