Hualan Biological Vaccine (SZSE:301207) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hualan Biological Vaccine Inc. (SZSE:301207) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hualan Biological Vaccine

What Is Hualan Biological Vaccine's Debt?

As you can see below, Hualan Biological Vaccine had CN¥300.0m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥2.83b in cash to offset that, meaning it has CN¥2.53b net cash.

How Strong Is Hualan Biological Vaccine's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hualan Biological Vaccine had liabilities of CN¥1.30b due within 12 months and liabilities of CN¥42.9m due beyond that. Offsetting these obligations, it had cash of CN¥2.83b as well as receivables valued at CN¥1.18b due within 12 months. So it can boast CN¥2.66b more liquid assets than total liabilities.

This excess liquidity suggests that Hualan Biological Vaccine 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. Succinctly put, Hualan Biological Vaccine boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Hualan Biological Vaccine grew its EBIT by 184% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hualan Biological Vaccine 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 Hualan Biological Vaccine 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 most recent three years, Hualan Biological Vaccine recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hualan Biological Vaccine has net cash of CN¥2.53b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 184% over the last year. So is Hualan Biological Vaccine's debt a risk? It doesn't seem so to us. 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. For example Hualan Biological Vaccine has 2 warning signs (and 1 which is concerning) we think 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.