Is Burning Rock Biotech (NASDAQ:BNR) 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 Burning Rock Biotech Limited (NASDAQ:BNR) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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¥41.3m of debt at December 2020, down from CN¥57.8m a year prior. But on the other hand it also has CN¥2.26b in cash, leading to a CN¥2.22b net cash position.

A Look At Burning Rock Biotech's Liabilities

Zooming in on the latest balance sheet data, we can see that Burning Rock Biotech had liabilities of CN¥241.5m due within 12 months and liabilities of CN¥491.0k due beyond that. On the other hand, it had cash of CN¥2.26b and CN¥113.0m worth of receivables due within a year. So it actually has CN¥2.13b 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. Simply put, the fact that Burning Rock Biotech 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 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 13%, to CN¥430m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Burning Rock Biotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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¥153m and booked a CN¥472m accounting loss. But the saving grace is the CN¥2.22b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Burning Rock Biotech that you should be aware of.

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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