Here's Why Mabpharm (HKG:2181) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Mabpharm Limited (HKG:2181) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Mabpharm Carry?

The image below, which you can click on for greater detail, shows that at June 2025 Mabpharm had debt of CN¥256.4m, up from CN¥193.8m in one year. However, it does have CN¥94.2m in cash offsetting this, leading to net debt of about CN¥162.3m.

How Strong Is Mabpharm's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mabpharm had liabilities of CN¥383.0m due within 12 months and liabilities of CN¥586.0m due beyond that. Offsetting this, it had CN¥94.2m in cash and CN¥148.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥726.3m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Mabpharm is worth CN¥2.41b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mabpharm's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Mabpharm

In the last year Mabpharm wasn't profitable at an EBIT level, but managed to grow its revenue by 180%, to CN¥424m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Mabpharm's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥24m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥8.1m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 1 warning sign for Mabpharm you should be aware of.

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.