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.' 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. Importantly, Akeso, Inc. (HKG:9926) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
How Much Debt Does Akeso Carry?
As you can see below, at the end of December 2021, Akeso had CN¥849.3m of debt, up from CN¥192.4m a year ago. Click the image for more detail. But it also has CN¥2.64b in cash to offset that, meaning it has CN¥1.79b net cash.
How Strong Is Akeso's Balance Sheet?
We can see from the most recent balance sheet that Akeso had liabilities of CN¥655.7m falling due within a year, and liabilities of CN¥869.8m due beyond that. Offsetting these obligations, it had cash of CN¥2.64b as well as receivables valued at CN¥101.8m due within 12 months. So it can boast CN¥1.22b more liquid assets than total liabilities.
This surplus suggests that Akeso has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Akeso has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Akeso can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
While it hasn't made a profit, at least Akeso booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Akeso?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Akeso had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥1.0b and booked a CN¥1.1b accounting loss. But the saving grace is the CN¥1.79b 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Akeso .
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.
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.