Does Autobio Diagnostics (SHSE:603658) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Autobio Diagnostics Co., Ltd. (SHSE:603658) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Autobio Diagnostics

How Much Debt Does Autobio Diagnostics Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Autobio Diagnostics had CN¥731.5m of debt, an increase on CN¥290.1m, over one year. But on the other hand it also has CN¥1.58b in cash, leading to a CN¥851.0m net cash position.

How Strong Is Autobio Diagnostics' Balance Sheet?

According to the last reported balance sheet, Autobio Diagnostics had liabilities of CN¥2.06b due within 12 months, and liabilities of CN¥695.1m due beyond 12 months. On the other hand, it had cash of CN¥1.58b and CN¥1.16b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Autobio Diagnostics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥30.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Autobio Diagnostics also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Autobio Diagnostics grew its EBIT by 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Autobio Diagnostics'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. Autobio Diagnostics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Autobio Diagnostics recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Autobio Diagnostics has CN¥851.0m in net cash. On top of that, it increased its EBIT by 14% in the last twelve months. So is Autobio Diagnostics's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Autobio Diagnostics is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.