Does Vcanbio Cell & Gene Engineering (SHSE:600645) 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.' 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. Importantly, Vcanbio Cell & Gene Engineering Corp., Ltd (SHSE:600645) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Vcanbio Cell & Gene Engineering

How Much Debt Does Vcanbio Cell & Gene Engineering Carry?

You can click the graphic below for the historical numbers, but it shows that Vcanbio Cell & Gene Engineering had CN¥35.7m of debt in March 2024, down from CN¥41.7m, one year before. 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?

We can see from the most recent balance sheet that Vcanbio Cell & Gene Engineering had liabilities of CN¥1.46b falling due within a year, and liabilities of CN¥126.4m due beyond that. Offsetting this, it had CN¥1.52b in cash and CN¥652.4m in receivables that were 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!

The good news is that Vcanbio Cell & Gene Engineering has increased its EBIT by 6.4% over twelve months, which should ease any concerns about debt repayment. 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vcanbio Cell & Gene Engineering 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 last three years, Vcanbio Cell & Gene Engineering actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Vcanbio Cell & Gene Engineering has CN¥1.48b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥205m, being 132% of its EBIT. So is Vcanbio Cell & Gene Engineering's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Vcanbio Cell & Gene Engineering, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.