Wuhan Keqian BiologyLtd (SHSE:688526) Has A Rock Solid 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. Importantly, Wuhan Keqian Biology Co.,Ltd (SHSE:688526) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Wuhan Keqian BiologyLtd

How Much Debt Does Wuhan Keqian BiologyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Wuhan Keqian BiologyLtd had debt of CN¥315.7m, up from CN¥271.7m in one year. However, it does have CN¥1.60b in cash offsetting this, leading to net cash of CN¥1.29b.

How Healthy Is Wuhan Keqian BiologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Wuhan Keqian BiologyLtd had liabilities of CN¥845.7m falling due within a year, and liabilities of CN¥124.4m due beyond that. Offsetting these obligations, it had cash of CN¥1.60b as well as receivables valued at CN¥399.2m due within 12 months. So it can boast CN¥1.03b 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.

Also positive, Wuhan Keqian BiologyLtd grew its EBIT by 26% 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 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'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. 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. Over the most recent three years, Wuhan Keqian BiologyLtd recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wuhan Keqian BiologyLtd has CN¥1.29b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 26% over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Wuhan Keqian BiologyLtd is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.