Is Alphamab Oncology (HKG:9966) Using Debt Sensibly?

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.' 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 can see that Alphamab Oncology (HKG:9966) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Alphamab Oncology

What Is Alphamab Oncology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Alphamab Oncology had CN¥498.8m of debt, an increase on CN¥296.5m, over one year. However, it does have CN¥1.71b in cash offsetting this, leading to net cash of CN¥1.21b.

How Strong Is Alphamab Oncology's Balance Sheet?

The latest balance sheet data shows that Alphamab Oncology had liabilities of CN¥523.9m due within a year, and liabilities of CN¥209.4m falling due after that. Offsetting this, it had CN¥1.71b in cash and CN¥83.3m in receivables that were due within 12 months. So it actually has CN¥1.06b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Alphamab Oncology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Alphamab Oncology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Alphamab Oncology managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Alphamab Oncology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Alphamab Oncology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥416m of cash and made a loss of CN¥292m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.21b. 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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Alphamab Oncology's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.