Here's Why WuXi AppTec (SHSE:603259) Can Manage Its Debt Responsibly

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. We note that WuXi AppTec Co., Ltd. (SHSE:603259) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for WuXi AppTec

What Is WuXi AppTec's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 WuXi AppTec had CN¥5.62b of debt, an increase on CN¥5.00b, over one year. However, it does have CN¥14.1b in cash offsetting this, leading to net cash of CN¥8.44b.

How Healthy Is WuXi AppTec's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WuXi AppTec had liabilities of CN¥12.9b due within 12 months and liabilities of CN¥5.73b due beyond that. On the other hand, it had cash of CN¥14.1b and CN¥9.55b worth of receivables due within a year. So it actually has CN¥4.95b more liquid assets than total liabilities.

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

On the other hand, WuXi AppTec saw its EBIT drop by 6.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WuXi AppTec can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. WuXi AppTec 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. Looking at the most recent three years, WuXi AppTec recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case WuXi AppTec has CN¥8.44b in net cash and a decent-looking balance sheet. So we don't have any problem with WuXi AppTec's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for WuXi AppTec that you should be aware of before investing here.

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.