Maccura BiotechnologyLtd (SZSE:300463) Has A Pretty Healthy Balance Sheet

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 Maccura Biotechnology Co.Ltd (SZSE:300463) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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.

See our latest analysis for Maccura BiotechnologyLtd

What Is Maccura BiotechnologyLtd's Net Debt?

As you can see below, Maccura BiotechnologyLtd had CN¥744.5m of debt at September 2024, down from CN¥795.4m a year prior. However, it does have CN¥950.0m in cash offsetting this, leading to net cash of CN¥205.5m.

How Strong Is Maccura BiotechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Maccura BiotechnologyLtd had liabilities of CN¥1.24b due within a year, and liabilities of CN¥348.7m falling due after that. On the other hand, it had cash of CN¥950.0m and CN¥1.62b worth of receivables due within a year. So it actually has CN¥982.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Maccura BiotechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 41% 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Maccura BiotechnologyLtd's ability to maintain a healthy balance sheet going forward. 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. Maccura BiotechnologyLtd 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, Maccura BiotechnologyLtd reported free cash flow worth 10% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Maccura BiotechnologyLtd has CN¥205.5m in net cash and a decent-looking balance sheet. 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. We've identified 1 warning sign with Maccura BiotechnologyLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.