Is Zai Lab (NASDAQ:ZLAB) 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 Zai Lab Limited (NASDAQ:ZLAB) does use debt in its business. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Zai Lab's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Zai Lab had debt of US$174.5m, up from US$70.3m in one year. However, its balance sheet shows it holds US$732.2m in cash, so it actually has US$557.7m net cash.

How Healthy Is Zai Lab's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zai Lab had liabilities of US$331.5m due within 12 months and liabilities of US$40.9m due beyond that. Offsetting these obligations, it had cash of US$732.2m as well as receivables valued at US$99.3m due within 12 months. So it can boast US$459.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Zai Lab could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zai Lab has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zai Lab'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.

See our latest analysis for Zai Lab

In the last year Zai Lab wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$428m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Zai Lab?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Zai Lab had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$231m of cash and made a loss of US$213m. While this does make the company a bit risky, it's important to remember it has net cash of US$557.7m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Zai Lab may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Zai Lab insider transactions.

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.