Does Cathay Biotech (SHSE:688065) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Cathay Biotech Inc. (SHSE:688065) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Cathay Biotech

What Is Cathay Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Cathay Biotech had CN¥1.30b of debt in September 2024, down from CN¥1.50b, one year before. However, its balance sheet shows it holds CN¥4.64b in cash, so it actually has CN¥3.34b net cash.

How Healthy Is Cathay Biotech's Balance Sheet?

According to the last reported balance sheet, Cathay Biotech had liabilities of CN¥2.37b due within 12 months, and liabilities of CN¥966.7m due beyond 12 months. Offsetting this, it had CN¥4.64b in cash and CN¥498.7m in receivables that were due within 12 months. So it actually has CN¥1.80b 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. Simply put, the fact that Cathay Biotech has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Cathay Biotech grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. 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 it is always sensible to investigate a company's debt, in this case Cathay Biotech has CN¥3.34b in net cash and a decent-looking balance sheet. And we liked the look of last year's 20% year-on-year EBIT growth. So we don't have any problem with Cathay Biotech's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Cathay Biotech 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.