Health Check: How Prudently Does Sunho Biologics (HKG:2898) Use 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. As with many other companies Sunho Biologics, Inc. (HKG:2898) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sunho Biologics

How Much Debt Does Sunho Biologics Carry?

As you can see below, Sunho Biologics had CN¥23.0m of debt at June 2024, down from CN¥34.4m a year prior. However, it does have CN¥494.8m in cash offsetting this, leading to net cash of CN¥471.8m.

A Look At Sunho Biologics' Liabilities

We can see from the most recent balance sheet that Sunho Biologics had liabilities of CN¥34.8m falling due within a year, and liabilities of CN¥4.60m due beyond that. On the other hand, it had cash of CN¥494.8m and CN¥9.29m worth of receivables due within a year. So it actually has CN¥464.7m more liquid assets than total liabilities.

This luscious liquidity implies that Sunho Biologics' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Sunho Biologics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sunho Biologics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

So How Risky Is Sunho Biologics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sunho Biologics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥149m of cash and made a loss of CN¥107m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥471.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Sunho Biologics that you should be aware of.

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.