WuXi AppTec (SHSE:603259) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that WuXi AppTec Co., Ltd. (SHSE:603259) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does WuXi AppTec Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 WuXi AppTec had CN¥7.73b of debt, an increase on CN¥4.41b, over one year. However, its balance sheet shows it holds CN¥20.3b in cash, so it actually has CN¥12.6b net cash.

A Look At WuXi AppTec's Liabilities

We can see from the most recent balance sheet that WuXi AppTec had liabilities of CN¥16.2b falling due within a year, and liabilities of CN¥5.01b due beyond that. Offsetting these obligations, it had cash of CN¥20.3b as well as receivables valued at CN¥9.13b due within 12 months. So it actually has CN¥8.21b 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!

Check out our latest analysis for WuXi AppTec

Also positive, WuXi AppTec grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. During the last three years, WuXi AppTec produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case WuXi AppTec has CN¥12.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 23% year-on-year EBIT growth. So we don't think WuXi AppTec's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that WuXi AppTec is showing 1 warning sign in our investment analysis , you should know about...

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.