Wuhan Keqian BiologyLtd (SHSE:688526) Has A Pretty Healthy Balance Sheet

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 can see that Wuhan Keqian Biology Co.,Ltd (SHSE:688526) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Wuhan Keqian BiologyLtd

What Is Wuhan Keqian BiologyLtd's Debt?

As you can see below, Wuhan Keqian BiologyLtd had CN¥58.3m of debt at September 2024, down from CN¥309.2m a year prior. But it also has CN¥1.07b in cash to offset that, meaning it has CN¥1.01b net cash.

A Look At Wuhan Keqian BiologyLtd's Liabilities

We can see from the most recent balance sheet that Wuhan Keqian BiologyLtd had liabilities of CN¥485.3m falling due within a year, and liabilities of CN¥88.0m due beyond that. Offsetting this, it had CN¥1.07b in cash and CN¥339.2m in receivables that were due within 12 months. So it actually has CN¥831.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Wuhan Keqian BiologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

It is just as well that Wuhan Keqian BiologyLtd's load is not too heavy, because its EBIT was down 50% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Wuhan Keqian BiologyLtd'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Wuhan Keqian BiologyLtd 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, Wuhan Keqian BiologyLtd generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd 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¥1.01b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥289m, being 84% of its EBIT. So we are not troubled with Wuhan Keqian BiologyLtd's debt use. 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. For example, we've discovered 1 warning sign for Wuhan Keqian BiologyLtd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.