Does Vcanbio Cell & Gene Engineering (SHSE:600645) Have A Healthy 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.' 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. As with many other companies Vcanbio Cell & Gene Engineering Corp., Ltd (SHSE:600645) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Vcanbio Cell & Gene Engineering

What Is Vcanbio Cell & Gene Engineering's Debt?

As you can see below, Vcanbio Cell & Gene Engineering had CN¥35.7m of debt at March 2024, down from CN¥41.7m a year prior. But on the other hand it also has CN¥1.52b in cash, leading to a CN¥1.48b net cash position.

How Strong Is Vcanbio Cell & Gene Engineering's Balance Sheet?

The latest balance sheet data shows that Vcanbio Cell & Gene Engineering had liabilities of CN¥1.46b due within a year, and liabilities of CN¥126.4m falling due after that. Offsetting these obligations, it had cash of CN¥1.52b as well as receivables valued at CN¥652.4m due within 12 months. So it can boast CN¥582.4m more liquid assets than total liabilities.

This surplus suggests that Vcanbio Cell & Gene Engineering has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vcanbio Cell & Gene Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Vcanbio Cell & Gene Engineering grew its EBIT by 6.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Vcanbio Cell & Gene Engineering will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Vcanbio Cell & Gene Engineering 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. Over the last three years, Vcanbio Cell & Gene Engineering actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Vcanbio Cell & Gene Engineering has net cash of CN¥1.48b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥205m, being 132% of its EBIT. So we don't think Vcanbio Cell & Gene Engineering's use of debt is risky. 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 Vcanbio Cell & Gene Engineering's earnings per share history for free.

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.