Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Innovent Biologics, Inc. (HKG:1801) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Innovent Biologics Carry?
The image below, which you can click on for greater detail, shows that Innovent Biologics had debt of CN¥802.0m at the end of June 2019, a reduction from CN¥4.25b over a year. However, it does have CN¥3.62b in cash offsetting this, leading to net cash of CN¥2.82b.
How Healthy Is Innovent Biologics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Innovent Biologics had liabilities of CN¥673.5m due within 12 months and liabilities of CN¥1.40b due beyond that. On the other hand, it had cash of CN¥3.62b and CN¥193.5m worth of receivables due within a year. So it can boast CN¥1.74b more liquid assets than total liabilities.
This surplus suggests that Innovent Biologics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Innovent Biologics 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 Innovent Biologics'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 Innovent Biologics managed to grow its revenue by 500%, to CN¥424m. That's virtually the hole-in-one of revenue growth!
So How Risky Is Innovent Biologics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Innovent Biologics had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through CN¥1.3b of cash and made a loss of CN¥6.5b. But the saving grace is the CN¥3.6b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Innovent Biologics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Innovent Biologics's profit, revenue, and operating cashflow have changed over the last few years.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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