Does Sunho Biologics (HKG:2898) Have A Healthy Balance Sheet?

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. We note that Sunho Biologics, Inc. (HKG:2898) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Sunho Biologics's Net Debt?

As you can see below, at the end of December 2024, Sunho Biologics had CN¥34.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥457.3m in cash, so it actually has CN¥423.0m net cash.

How Strong Is Sunho Biologics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sunho Biologics had liabilities of CN¥44.1m due within 12 months and liabilities of CN¥4.65m due beyond that. Offsetting this, it had CN¥457.3m in cash and CN¥8.19m in receivables that were due within 12 months. So it actually has CN¥416.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Sunho Biologics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Sunho Biologics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Sunho Biologics's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

See our latest analysis for Sunho Biologics

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

So How Risky Is Sunho Biologics?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Sunho Biologics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥158m and booked a CN¥80m accounting loss. But the saving grace is the CN¥423.0m 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. 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. We've identified 3 warning signs with Sunho Biologics (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.