Does Vcanbio Cell & Gene Engineering (SHSE:600645) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Vcanbio Cell & Gene Engineering Corp., Ltd (SHSE:600645) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Vcanbio Cell & Gene Engineering

What Is Vcanbio Cell & Gene Engineering's Net Debt?

As you can see below, at the end of September 2024, Vcanbio Cell & Gene Engineering had CN¥40.8m of debt, up from CN¥11.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.44b in cash, so it actually has CN¥1.40b net cash.

A Look At Vcanbio Cell & Gene Engineering's Liabilities

We can see from the most recent balance sheet that Vcanbio Cell & Gene Engineering had liabilities of CN¥1.48b falling due within a year, and liabilities of CN¥118.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.44b as well as receivables valued at CN¥702.4m due within 12 months. So it actually has CN¥540.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Vcanbio Cell & Gene Engineering could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Vcanbio Cell & Gene Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Vcanbio Cell & Gene Engineering has seen its EBIT plunge 16% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vcanbio Cell & Gene Engineering 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 it is always sensible to investigate a company's debt, in this case Vcanbio Cell & Gene Engineering has CN¥1.40b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 131% of that EBIT to free cash flow, bringing in CN¥209m. So we are not troubled with Vcanbio Cell & Gene Engineering's debt use. 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.

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.

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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.