Fujian Wanchen Biotechnology Group (SZSE:300972) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Fujian Wanchen Biotechnology Group Co., Ltd. (SZSE:300972) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fujian Wanchen Biotechnology Group

How Much Debt Does Fujian Wanchen Biotechnology Group Carry?

As you can see below, at the end of September 2024, Fujian Wanchen Biotechnology Group had CN¥1.25b of debt, up from CN¥674.0m a year ago. Click the image for more detail. But it also has CN¥2.29b in cash to offset that, meaning it has CN¥1.04b net cash.

How Strong Is Fujian Wanchen Biotechnology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fujian Wanchen Biotechnology Group had liabilities of CN¥4.59b due within 12 months and liabilities of CN¥680.6m due beyond that. Offsetting these obligations, it had cash of CN¥2.29b as well as receivables valued at CN¥85.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.89b.

Fujian Wanchen Biotechnology Group has a market capitalization of CN¥13.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Fujian Wanchen Biotechnology Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Fujian Wanchen Biotechnology Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥648m in EBIT over the last twelve months. 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 Fujian Wanchen Biotechnology Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Fujian Wanchen Biotechnology Group 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. Happily for any shareholders, Fujian Wanchen Biotechnology Group actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Fujian Wanchen Biotechnology Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.04b. And it impressed us with free cash flow of CN¥1.9b, being 288% of its EBIT. So is Fujian Wanchen Biotechnology Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Fujian Wanchen Biotechnology Group (1 is a bit concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.