Pulike Biological Engineering (SHSE:603566) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 Pulike Biological Engineering, Inc. (SHSE:603566) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Pulike Biological Engineering

How Much Debt Does Pulike Biological Engineering Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Pulike Biological Engineering had debt of CN¥12.1m, up from CN¥7.00m in one year. However, it does have CN¥836.8m in cash offsetting this, leading to net cash of CN¥824.6m.

How Healthy Is Pulike Biological Engineering's Balance Sheet?

The latest balance sheet data shows that Pulike Biological Engineering had liabilities of CN¥570.7m due within a year, and liabilities of CN¥40.3m falling due after that. On the other hand, it had cash of CN¥836.8m and CN¥474.8m worth of receivables due within a year. So it can boast CN¥700.5m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Pulike Biological Engineering has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Pulike Biological Engineering 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. While Pulike Biological Engineering 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. Over the last three years, Pulike Biological Engineering saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pulike Biological Engineering has CN¥824.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 46% year-on-year EBIT growth. So we are not troubled with Pulike Biological Engineering's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Pulike Biological Engineering .

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.