Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Shanghai Henlius Biotech, Inc. (HKG:2696) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Shanghai Henlius Biotech Carry?
As you can see below, at the end of December 2021, Shanghai Henlius Biotech had CN¥2.33b of debt, up from CN¥1.54b a year ago. Click the image for more detail. However, it also had CN¥707.3m in cash, and so its net debt is CN¥1.62b.
A Look At Shanghai Henlius Biotech's Liabilities
We can see from the most recent balance sheet that Shanghai Henlius Biotech had liabilities of CN¥2.96b falling due within a year, and liabilities of CN¥1.92b due beyond that. Offsetting this, it had CN¥707.3m in cash and CN¥295.7m in receivables that were due within 12 months. So its liabilities total CN¥3.87b more than the combination of its cash and short-term receivables.
Shanghai Henlius Biotech has a market capitalization of CN¥8.82b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Henlius Biotech'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.
In the last year Shanghai Henlius Biotech wasn't profitable at an EBIT level, but managed to grow its revenue by 186%, to CN¥1.7b. So there's no doubt that shareholders are cheering for growth
While we can certainly appreciate Shanghai Henlius Biotech's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥665m. 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. Another cause for caution is that is bled CN¥1.6b in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Shanghai Henlius Biotech .
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.