Does Walvax Biotechnology (SZSE:300142) Have A Healthy Balance Sheet?

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. As with many other companies Walvax Biotechnology Co., Ltd. (SZSE:300142) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Walvax Biotechnology

What Is Walvax Biotechnology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Walvax Biotechnology had CN¥712.0m of debt, an increase on CN¥516.8m, over one year. But on the other hand it also has CN¥3.62b in cash, leading to a CN¥2.91b net cash position.

How Healthy Is Walvax Biotechnology's Balance Sheet?

The latest balance sheet data shows that Walvax Biotechnology had liabilities of CN¥2.39b due within a year, and liabilities of CN¥883.7m falling due after that. On the other hand, it had cash of CN¥3.62b and CN¥2.80b worth of receivables due within a year. So it actually has CN¥3.15b more liquid assets than total liabilities.

This excess liquidity suggests that Walvax Biotechnology is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Walvax Biotechnology has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Walvax Biotechnology's load is not too heavy, because its EBIT was down 64% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Walvax Biotechnology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Walvax Biotechnology 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. Looking at the most recent three years, Walvax Biotechnology recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Walvax Biotechnology has CN¥2.91b in net cash and a decent-looking balance sheet. So we are not troubled with Walvax Biotechnology'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. Be aware that Walvax Biotechnology is showing 2 warning signs in our investment analysis , 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.