These 4 Measures Indicate That Chengdu Olymvax Biopharmaceuticals (SHSE:688319) Is Using Debt Extensively

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Chengdu Olymvax Biopharmaceuticals Inc. (SHSE:688319) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Chengdu Olymvax Biopharmaceuticals

What Is Chengdu Olymvax Biopharmaceuticals's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Chengdu Olymvax Biopharmaceuticals had CN¥184.0m of debt, an increase on CN¥125.0m, over one year. But on the other hand it also has CN¥350.3m in cash, leading to a CN¥166.3m net cash position.

How Strong Is Chengdu Olymvax Biopharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Chengdu Olymvax Biopharmaceuticals had liabilities of CN¥408.3m due within 12 months, and liabilities of CN¥157.6m due beyond 12 months. On the other hand, it had cash of CN¥350.3m and CN¥493.3m worth of receivables due within a year. So it can boast CN¥277.7m more liquid assets than total liabilities.

This surplus suggests that Chengdu Olymvax Biopharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Chengdu Olymvax Biopharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Chengdu Olymvax Biopharmaceuticals's EBIT was down 77% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Chengdu Olymvax Biopharmaceuticals 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 Chengdu Olymvax Biopharmaceuticals 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, Chengdu Olymvax Biopharmaceuticals 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 we empathize with investors who find debt concerning, you should keep in mind that Chengdu Olymvax Biopharmaceuticals has net cash of CN¥166.3m, as well as more liquid assets than liabilities. So while Chengdu Olymvax Biopharmaceuticals does not have a great balance sheet, it's certainly not too bad. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Chengdu Olymvax Biopharmaceuticals's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.