Is Sansure Biotech (SHSE:688289) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Sansure Biotech Inc. (SHSE:688289) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, 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 Sansure Biotech

What Is Sansure Biotech's Debt?

As you can see below, at the end of June 2024, Sansure Biotech had CN¥404.6m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥4.72b in cash to offset that, meaning it has CN¥4.31b net cash.

How Healthy Is Sansure Biotech's Balance Sheet?

According to the last reported balance sheet, Sansure Biotech had liabilities of CN¥671.0m due within 12 months, and liabilities of CN¥496.8m due beyond 12 months. On the other hand, it had cash of CN¥4.72b and CN¥715.5m worth of receivables due within a year. So it actually has CN¥4.27b more liquid assets than total liabilities.

This excess liquidity is a great indication that Sansure Biotech's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Sansure Biotech has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Sansure Biotech's saving grace is its low debt levels, because its EBIT has tanked 96% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sansure Biotech can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. While Sansure Biotech 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. During the last three years, Sansure Biotech produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. 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 investigate a company's debt, in this case Sansure Biotech has CN¥4.31b in net cash and a decent-looking balance sheet. So is Sansure Biotech'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Sansure Biotech you should be aware of, and 1 of them makes us a bit uncomfortable.

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.