These 4 Measures Indicate That WuXi AppTec (SHSE:603259) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies WuXi AppTec Co., Ltd. (SHSE:603259) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for WuXi AppTec

How Much Debt Does WuXi AppTec Carry?

As you can see below, at the end of March 2024, WuXi AppTec had CN¥5.77b of debt, up from CN¥4.65b a year ago. Click the image for more detail. But it also has CN¥16.2b in cash to offset that, meaning it has CN¥10.5b net cash.

How Healthy Is WuXi AppTec's Balance Sheet?

We can see from the most recent balance sheet that WuXi AppTec had liabilities of CN¥13.4b falling due within a year, and liabilities of CN¥5.50b due beyond that. Offsetting these obligations, it had cash of CN¥16.2b as well as receivables valued at CN¥8.43b due within 12 months. So it can boast CN¥5.76b more liquid assets than total liabilities.

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

And we also note warmly that WuXi AppTec grew its EBIT by 10% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 32% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that WuXi AppTec has net cash of CN¥10.5b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 10% in the last twelve months. 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. However, not all investment risk resides within the balance sheet - far from it. For example - WuXi AppTec has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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