Zai Lab (NASDAQ:ZLAB) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Zai Lab Limited (NASDAQ:ZLAB) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Zai Lab

What Is Zai Lab's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Zai Lab had debt of US$70.3m, up from none in one year. But on the other hand it also has US$630.0m in cash, leading to a US$559.8m net cash position.

How Strong Is Zai Lab's Balance Sheet?

According to the last reported balance sheet, Zai Lab had liabilities of US$251.7m due within 12 months, and liabilities of US$31.5m due beyond 12 months. Offsetting these obligations, it had cash of US$630.0m as well as receivables valued at US$77.7m due within 12 months. So it actually has US$424.6m more liquid assets than total liabilities.

This surplus suggests that Zai Lab is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Zai Lab boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Zai Lab can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Zai Lab wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to US$323m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zai Lab?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Zai Lab had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$215m and booked a US$298m accounting loss. But the saving grace is the US$559.8m on the balance sheet. That means it could keep spending at its current rate for more than two years. Zai Lab's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Zai Lab I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.