Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, WuXi Biologics (Cayman) Inc. (HKG:2269) does carry debt. But is this debt a concern to shareholders?
We've discovered 2 warning signs about WuXi Biologics (Cayman). View them for free.What Risk Does Debt Bring?
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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does WuXi Biologics (Cayman) Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2024 WuXi Biologics (Cayman) had CN¥2.64b of debt, an increase on CN¥2.15b, over one year. But it also has CN¥10.7b in cash to offset that, meaning it has CN¥8.07b net cash.
How Strong Is WuXi Biologics (Cayman)'s Balance Sheet?
According to the last reported balance sheet, WuXi Biologics (Cayman) had liabilities of CN¥8.62b due within 12 months, and liabilities of CN¥2.88b due beyond 12 months. Offsetting this, it had CN¥10.7b in cash and CN¥6.37b in receivables that were due within 12 months. So it actually has CN¥5.58b more liquid assets than total liabilities.
This short term liquidity is a sign that WuXi Biologics (Cayman) could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that WuXi Biologics (Cayman) has more cash than debt is arguably a good indication that it can manage its debt safely.
View our latest analysis for WuXi Biologics (Cayman)
And we also note warmly that WuXi Biologics (Cayman) grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine WuXi Biologics (Cayman)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While WuXi Biologics (Cayman) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, WuXi Biologics (Cayman) reported free cash flow worth 12% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case WuXi Biologics (Cayman) has CN¥8.07b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with WuXi Biologics (Cayman)'s debt use. 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. For instance, we've identified 2 warning signs for WuXi Biologics (Cayman) that 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.