Is Walvax Biotechnology (SZSE:300142) A Risky Investment?

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, Walvax Biotechnology Co., Ltd. (SZSE:300142) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Walvax Biotechnology

How Much Debt Does Walvax Biotechnology Carry?

As you can see below, at the end of September 2023, Walvax Biotechnology had CN¥516.8m of debt, up from CN¥424.4m a year ago. Click the image for more detail. However, it does have CN¥4.09b in cash offsetting this, leading to net cash of CN¥3.57b.

A Look At Walvax Biotechnology's Liabilities

We can see from the most recent balance sheet that Walvax Biotechnology had liabilities of CN¥3.03b falling due within a year, and liabilities of CN¥957.8m due beyond that. Offsetting this, it had CN¥4.09b in cash and CN¥3.56b in receivables that were due within 12 months. So it can boast CN¥3.65b more liquid assets than total liabilities.

This short term liquidity is a sign that Walvax Biotechnology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Walvax Biotechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Walvax Biotechnology's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 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. While Walvax Biotechnology 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, Walvax Biotechnology recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Walvax Biotechnology has net cash of CN¥3.57b, as well as more liquid assets than liabilities. So we are not troubled with Walvax Biotechnology's debt use. 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 Walvax Biotechnology's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.