We Think Walvax Biotechnology (SZSE:300142) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Walvax Biotechnology Co., Ltd. (SZSE:300142) does use debt in its business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Walvax Biotechnology

What Is Walvax Biotechnology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Walvax Biotechnology had debt of CN¥712.0m, up from CN¥516.8m in one year. However, it does have CN¥3.62b in cash offsetting this, leading to net cash of CN¥2.91b.

How Strong Is Walvax Biotechnology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Walvax Biotechnology had liabilities of CN¥2.39b due within 12 months and liabilities of CN¥883.7m due beyond that. Offsetting these obligations, it had cash of CN¥3.62b as well as receivables valued at CN¥2.80b due within 12 months. So it actually has CN¥3.15b more liquid assets than total liabilities.

This surplus suggests that Walvax Biotechnology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Walvax Biotechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Walvax Biotechnology if management cannot prevent a repeat of the 64% 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. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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. In the last three years, Walvax Biotechnology's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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 don't have any problem with Walvax Biotechnology's use of debt. 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 3 warning signs 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.