WuXi AppTec (SHSE:603259) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for WuXi AppTec

What Is WuXi AppTec's Debt?

The image below, which you can click on for greater detail, shows that WuXi AppTec had debt of CN¥4.35b at the end of December 2023, a reduction from CN¥4.68b over a year. However, its balance sheet shows it holds CN¥14.6b in cash, so it actually has CN¥10.2b net cash.

How Strong Is WuXi AppTec's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WuXi AppTec had liabilities of CN¥14.8b due within 12 months and liabilities of CN¥3.40b due beyond that. Offsetting this, it had CN¥14.6b in cash and CN¥9.32b in receivables that were due within 12 months. So it actually has CN¥5.73b 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. Succinctly put, WuXi AppTec boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that WuXi AppTec has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine WuXi AppTec's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While WuXi AppTec 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. In the last three years, WuXi AppTec's free cash flow amounted to 25% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that WuXi AppTec has net cash of CN¥10.2b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So is WuXi AppTec's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with WuXi AppTec , and understanding them should be part of your investment process.

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.