These 4 Measures Indicate That Wuhan Keqian BiologyLtd (SHSE:688526) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Wuhan Keqian Biology Co.,Ltd (SHSE:688526) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wuhan Keqian BiologyLtd

What Is Wuhan Keqian BiologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Wuhan Keqian BiologyLtd had CN¥232.1m of debt in June 2024, down from CN¥318.2m, one year before. But it also has CN¥2.07b in cash to offset that, meaning it has CN¥1.84b net cash.

A Look At Wuhan Keqian BiologyLtd's Liabilities

According to the last reported balance sheet, Wuhan Keqian BiologyLtd had liabilities of CN¥620.4m due within 12 months, and liabilities of CN¥86.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.07b as well as receivables valued at CN¥360.5m due within 12 months. So it can boast CN¥1.73b more liquid assets than total liabilities.

This excess liquidity is a great indication that Wuhan Keqian BiologyLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Wuhan Keqian BiologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Wuhan Keqian BiologyLtd if management cannot prevent a repeat of the 46% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wuhan Keqian BiologyLtd 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. While Wuhan Keqian BiologyLtd 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, Wuhan Keqian BiologyLtd recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wuhan Keqian BiologyLtd has net cash of CN¥1.84b, as well as more liquid assets than liabilities. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥385m. So we don't think Wuhan Keqian BiologyLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Wuhan Keqian BiologyLtd you should know about.

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.