Is Concord Biotech (NSE:CONCORDBIO) Using Too Much Debt?

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.' 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. We note that Concord Biotech Limited (NSE:CONCORDBIO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Concord Biotech

What Is Concord Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Concord Biotech had ₹229.7m of debt in September 2023, down from ₹312.4m, one year before. But on the other hand it also has ₹2.25b in cash, leading to a ₹2.02b net cash position.

How Healthy Is Concord Biotech's Balance Sheet?

According to the last reported balance sheet, Concord Biotech had liabilities of ₹1.67b due within 12 months, and liabilities of ₹292.7m due beyond 12 months. Offsetting this, it had ₹2.25b in cash and ₹2.67b in receivables that were due within 12 months. So it actually has ₹2.95b more liquid assets than total liabilities.

This surplus suggests that Concord Biotech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Concord Biotech has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Concord Biotech grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Concord Biotech'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Concord Biotech has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Concord Biotech's free cash flow amounted to 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Concord Biotech has net cash of ₹2.02b, as well as more liquid assets than liabilities. And we liked the look of last year's 36% year-on-year EBIT growth. So we don't think Concord Biotech's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Concord Biotech's earnings per share history for free.

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.