Health Check: How Carefully Does Genscript Biotech (HKG:1548) Use Debt?
Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Genscript Biotech Corporation (HKG:1548) uses debt. But should shareholders worry about its use of debt?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for Genscript Biotech
What is Genscript Biotech’s debt?
As you can see below, at the end of December 2021, Genscript Biotech had a debt of $121.6 million, compared to $45.9 million a year ago. Click on the image for more details. But on the flip side, it also has $1.40 billion in cash, resulting in a net cash position of $1.28 billion.
A Look at Genscript Biotech’s Responsibilities
Zooming in on the latest balance sheet data, we can see that Genscript Biotech had liabilities of US$464.4 million due within 12 months and liabilities of US$675.4 million due beyond. As compensation for these obligations, it had cash of US$1.40 billion and receivables valued at US$144.0 million due within 12 months. He can therefore boast of having $407.4 million in cash more than total Passives.
This surplus suggests that Genscript Biotech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Genscript Biotech has more cash than debt is arguably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Genscript Biotech can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Genscript Biotech was not profitable in terms of EBIT, but managed to increase its revenue by 31%, to $511 million. The shareholders probably have their fingers crossed that she can make a profit.
So, how risky is Genscript Biotech?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And the fact is that over the past twelve months, Genscript Biotech has been losing money in earnings before interest and taxes (EBIT). Indeed, during this period, it burned $274 million in cash and suffered a loss of $348 million. Given that it only has net cash of US$1.28 billion, the company may need to raise more capital if it doesn’t break even soon. Genscript Biotech’s revenue growth has shone over the past year, so it may well be in a position to turn a profit in due course. By investing before these profits, shareholders take on more risk in the hope of greater rewards. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example – Genscript Biotech has 2 warning signs we think you should know.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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