Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Mabpharm Limited (HKG:2181) does carry debt. But should shareholders be worried about its use of debt?
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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Mabpharm's Debt?
As you can see below, at the end of December 2024, Mabpharm had CN¥245.6m of debt, up from CN¥232.2m a year ago. Click the image for more detail. However, it does have CN¥89.3m in cash offsetting this, leading to net debt of about CN¥156.2m.
How Healthy Is Mabpharm's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Mabpharm had liabilities of CN¥312.1m due within 12 months and liabilities of CN¥615.2m due beyond that. Offsetting this, it had CN¥89.3m in cash and CN¥94.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥743.4m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Mabpharm is worth CN¥1.93b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mabpharm will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
See our latest analysis for Mabpharm
In the last year Mabpharm wasn't profitable at an EBIT level, but managed to grow its revenue by 196%, to CN¥258m. So there's no doubt that shareholders are cheering for growth
Caveat Emptor
Even though Mabpharm managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥118m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥128m. So to be blunt we do think it is risky. 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 example - Mabpharm has 1 warning sign we think you should be aware of.
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.