Is Biosino Bio-Technology and Science Incorporation (HKG:8247) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Biosino Bio-Technology and Science Incorporation (HKG:8247) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Biosino Bio-Technology and Science Incorporation

How Much Debt Does Biosino Bio-Technology and Science Incorporation Carry?

The chart below, which you can click on for greater detail, shows that Biosino Bio-Technology and Science Incorporation had CN¥142.7m in debt in December 2023; about the same as the year before. On the flip side, it has CN¥63.4m in cash leading to net debt of about CN¥79.3m.

A Look At Biosino Bio-Technology and Science Incorporation's Liabilities

We can see from the most recent balance sheet that Biosino Bio-Technology and Science Incorporation had liabilities of CN¥320.7m falling due within a year, and liabilities of CN¥11.1m due beyond that. On the other hand, it had cash of CN¥63.4m and CN¥179.8m worth of receivables due within a year. So its liabilities total CN¥88.6m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥86.9m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Biosino Bio-Technology and Science Incorporation'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.

Over 12 months, Biosino Bio-Technology and Science Incorporation made a loss at the EBIT level, and saw its revenue drop to CN¥289m, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

While Biosino Bio-Technology and Science Incorporation's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥19m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥23m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Biosino Bio-Technology and Science Incorporation (1 is a bit unpleasant) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.