Is Burning Rock Biotech (NASDAQ:BNR) Using Too Much Debt?

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.' 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 Burning Rock Biotech Limited (NASDAQ:BNR) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Burning Rock Biotech

What Is Burning Rock Biotech's Debt?

The image below, which you can click on for greater detail, shows that Burning Rock Biotech had debt of CN¥41.3m at the end of December 2020, a reduction from CN¥57.8m over a year. But on the other hand it also has CN¥2.26b in cash, leading to a CN¥2.22b net cash position.

How Strong Is Burning Rock Biotech's Balance Sheet?

According to the last reported balance sheet, Burning Rock Biotech had liabilities of CN¥241.5m due within 12 months, and liabilities of CN¥491.0k due beyond 12 months. Offsetting this, it had CN¥2.26b in cash and CN¥111.0m in receivables that were due within 12 months. So it can boast CN¥2.13b more liquid assets than total liabilities.

This short term liquidity is a sign that Burning Rock Biotech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Burning Rock Biotech boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Burning Rock Biotech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Burning Rock Biotech reported revenue of CN¥430m, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Burning Rock Biotech?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Burning Rock Biotech had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥74m of cash and made a loss of CN¥472m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥2.22b. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Burning Rock Biotech is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

This article by Simply Wall St is general in nature. 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.

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