Is Burning Rock Biotech (NASDAQ:BNR) Using Debt In A Risky Way?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Burning Rock Biotech Limited (NASDAQ:BNR) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Burning Rock Biotech

What Is Burning Rock Biotech's Net Debt?

As you can see below, Burning Rock Biotech had CN¥40.1m of debt at March 2021, down from CN¥61.2m a year prior. But on the other hand it also has CN¥2.12b in cash, leading to a CN¥2.08b net cash position.

How Strong Is Burning Rock Biotech's Balance Sheet?

The latest balance sheet data shows that Burning Rock Biotech had liabilities of CN¥275.1m due within a year, and liabilities of CN¥73.7m falling due after that. On the other hand, it had cash of CN¥2.12b and CN¥101.3m worth of receivables due within a year. So it can boast CN¥1.87b more liquid assets than total liabilities.

This surplus suggests that Burning Rock Biotech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Burning Rock Biotech 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 Burning Rock 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.

In the last year Burning Rock Biotech wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to CN¥469m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Burning Rock Biotech?

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 Burning Rock Biotech 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¥259m and booked a CN¥564m accounting loss. But the saving grace is the CN¥2.08b on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Burning Rock Biotech may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Burning Rock Biotech that you should be aware of before investing here.

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.
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