We Think Fujian Wanchen Biotechnology Group (SZSE:300972) Is Taking Some Risk With Its Debt

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. As with many other companies Fujian Wanchen Biotechnology Group Co., Ltd. (SZSE:300972) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fujian Wanchen Biotechnology Group

What Is Fujian Wanchen Biotechnology Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Fujian Wanchen Biotechnology Group had debt of CN¥957.6m, up from CN¥385.7m in one year. However, its balance sheet shows it holds CN¥1.71b in cash, so it actually has CN¥747.5m 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¥2.83b due within 12 months and liabilities of CN¥591.5m due beyond that. Offsetting this, it had CN¥1.71b in cash and CN¥117.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.60b.

Fujian Wanchen Biotechnology Group has a market capitalization of CN¥3.60b, 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.

Importantly, Fujian Wanchen Biotechnology Group's EBIT fell a jaw-dropping 71% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Fujian Wanchen Biotechnology Group does have more liabilities than liquid assets, it also has net cash of CN¥747.5m. The cherry on top was that in converted 934% of that EBIT to free cash flow, bringing in CN¥1.0b. So while Fujian Wanchen Biotechnology Group does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Fujian Wanchen Biotechnology Group you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com