Cathay Biotech (SHSE:688065) Has A Somewhat Strained Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Cathay Biotech Inc. (SHSE:688065) does carry debt. But is this debt a concern to shareholders?

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.

See our latest analysis for Cathay Biotech

What Is Cathay Biotech's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Cathay Biotech had debt of CN¥1.68b, up from CN¥1.42b in one year. However, it does have CN¥4.99b in cash offsetting this, leading to net cash of CN¥3.31b.

A Look At Cathay Biotech's Liabilities

The latest balance sheet data shows that Cathay Biotech had liabilities of CN¥2.75b due within a year, and liabilities of CN¥1.00b falling due after that. Offsetting this, it had CN¥4.99b in cash and CN¥440.1m in receivables that were due within 12 months. So it actually has CN¥1.67b more liquid assets than total liabilities.

This short term liquidity is a sign that Cathay Biotech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cathay Biotech boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Cathay Biotech's saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cathay Biotech's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Cathay Biotech 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. During the last three years, Cathay Biotech burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cathay Biotech has net cash of CN¥3.31b, as well as more liquid assets than liabilities. So while Cathay Biotech 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. Be aware that Cathay Biotech is showing 1 warning sign in our investment analysis , 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.