Alphamab Oncology (HKG:9966) Could Easily Take On More Debt

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. As with many other companies Alphamab Oncology (HKG:9966) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Alphamab Oncology's Net Debt?

The image below, which you can click on for greater detail, shows that Alphamab Oncology had debt of CN¥182.2m at the end of December 2024, a reduction from CN¥250.0m over a year. But on the other hand it also has CN¥1.57b in cash, leading to a CN¥1.39b net cash position.

How Healthy Is Alphamab Oncology's Balance Sheet?

According to the last reported balance sheet, Alphamab Oncology had liabilities of CN¥254.0m due within 12 months, and liabilities of CN¥155.8m due beyond 12 months. On the other hand, it had cash of CN¥1.57b and CN¥58.1m worth of receivables due within a year. So it actually has CN¥1.22b more liquid assets than total liabilities.

This surplus suggests that Alphamab Oncology is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Alphamab Oncology has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Alphamab Oncology

It was also good to see that despite losing money on the EBIT line last year, Alphamab Oncology turned things around in the last 12 months, delivering and EBIT of CN¥101m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Alphamab Oncology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Alphamab Oncology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Alphamab Oncology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Alphamab Oncology has net cash of CN¥1.39b, as well as more liquid assets than liabilities. The cherry on top was that in converted 189% of that EBIT to free cash flow, bringing in CN¥191m. So is Alphamab Oncology's debt a risk? It doesn't seem so to us. 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 example, we've discovered 2 warning signs for Alphamab Oncology that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.