Is Maccura BiotechnologyLtd (SZSE:300463) Using Too Much Debt?

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.' 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 Maccura Biotechnology Co.Ltd (SZSE:300463) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Maccura BiotechnologyLtd

How Much Debt Does Maccura BiotechnologyLtd Carry?

As you can see below, Maccura BiotechnologyLtd had CN¥702.2m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥959.7m in cash offsetting this, leading to net cash of CN¥257.5m.

A Look At Maccura BiotechnologyLtd's Liabilities

The latest balance sheet data shows that Maccura BiotechnologyLtd had liabilities of CN¥1.08b due within a year, and liabilities of CN¥329.5m falling due after that. Offsetting these obligations, it had cash of CN¥959.7m as well as receivables valued at CN¥1.80b due within 12 months. So it actually has CN¥1.35b more liquid assets than total liabilities.

This excess liquidity suggests that Maccura BiotechnologyLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Maccura BiotechnologyLtd 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 Maccura BiotechnologyLtd if management cannot prevent a repeat of the 56% cut to EBIT 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 Maccura BiotechnologyLtd 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 Maccura BiotechnologyLtd 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, Maccura BiotechnologyLtd's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Maccura BiotechnologyLtd has net cash of CN¥257.5m, as well as more liquid assets than liabilities. So we are not troubled with Maccura BiotechnologyLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Maccura BiotechnologyLtd is showing 2 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.

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