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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Autobio Diagnostics Co., Ltd. (SHSE:603658) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Autobio Diagnostics

What Is Autobio Diagnostics's Net Debt?

As you can see below, Autobio Diagnostics had CN¥556.4m of debt at September 2024, down from CN¥663.4m a year prior. However, its balance sheet shows it holds CN¥832.2m in cash, so it actually has CN¥275.8m net cash.

How Strong Is Autobio Diagnostics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Autobio Diagnostics had liabilities of CN¥2.39b due within 12 months and liabilities of CN¥515.4m due beyond that. Offsetting these obligations, it had cash of CN¥832.2m as well as receivables valued at CN¥1.29b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥783.4m.

Since publicly traded Autobio Diagnostics shares are worth a total of CN¥25.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Autobio Diagnostics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Autobio Diagnostics 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 most recent three years, Autobio Diagnostics recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Autobio Diagnostics has CN¥275.8m in net cash. On top of that, it increased its EBIT by 13% in the last twelve months. So is Autobio Diagnostics's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Autobio Diagnostics's earnings per share history for free.

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.

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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.