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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Walvax Biotechnology Co., Ltd. (SZSE:300142) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Walvax Biotechnology

What Is Walvax Biotechnology's Net Debt?

As you can see below, at the end of March 2024, Walvax Biotechnology had CN¥791.0m of debt, up from CN¥409.8m a year ago. Click the image for more detail. But it also has CN¥4.11b in cash to offset that, meaning it has CN¥3.32b net cash.

How Healthy Is Walvax Biotechnology's Balance Sheet?

We can see from the most recent balance sheet that Walvax Biotechnology had liabilities of CN¥2.98b falling due within a year, and liabilities of CN¥975.5m due beyond that. On the other hand, it had cash of CN¥4.11b and CN¥3.22b worth of receivables due within a year. So it can boast CN¥3.38b more liquid assets than total liabilities.

This excess liquidity suggests that Walvax Biotechnology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues 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.

The modesty of its debt load may become crucial for Walvax Biotechnology if management cannot prevent a repeat of the 47% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. 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 it is always sensible to investigate a company's debt, in this case Walvax Biotechnology has CN¥3.32b 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Walvax Biotechnology is showing 2 warning signs in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com