Health Check: How Prudently Does Akeso (HKG:9926) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Akeso, Inc. (HKG:9926) does have debt on its balance sheet. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Akeso

What Is Akeso's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Akeso had CN¥1.87b of debt, an increase on CN¥849.3m, over one year. However, it does have CN¥2.29b in cash offsetting this, leading to net cash of CN¥421.0m.

How Healthy Is Akeso's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Akeso had liabilities of CN¥1.36b due within 12 months and liabilities of CN¥1.59b due beyond that. Offsetting this, it had CN¥2.29b in cash and CN¥271.0m in receivables that were due within 12 months. So its liabilities total CN¥388.6m more than the combination of its cash and short-term receivables.

Having regard to Akeso's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥33.7b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Akeso also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Akeso'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 Akeso wasn't profitable at an EBIT level, but managed to grow its revenue by 271%, to CN¥838m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Akeso?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Akeso had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥1.2b and booked a CN¥1.2b accounting loss. But the saving grace is the CN¥421.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Akeso has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. For example - Akeso has 1 warning sign we think you should be aware of.

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.