These 4 Measures Indicate That China Biotech Services Holdings (HKG:8037) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 China Biotech Services Holdings Limited (HKG:8037) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Biotech Services Holdings

What Is China Biotech Services Holdings's Debt?

As you can see below, China Biotech Services Holdings had HK$54.9m of debt at June 2023, down from HK$57.9m a year prior. But it also has HK$245.4m in cash to offset that, meaning it has HK$190.5m net cash.

How Strong Is China Biotech Services Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Biotech Services Holdings had liabilities of HK$172.6m due within 12 months and liabilities of HK$74.6m due beyond that. On the other hand, it had cash of HK$245.4m and HK$90.5m worth of receivables due within a year. So it can boast HK$88.7m more liquid assets than total liabilities.

It's good to see that China Biotech Services Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, China Biotech Services Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, China Biotech Services Holdings grew its EBIT by 95% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Biotech Services Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While China Biotech Services Holdings 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 last three years, China Biotech Services Holdings recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Biotech Services Holdings has HK$190.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$513m, being 82% of its EBIT. The bottom line is that we do not find China Biotech Services Holdings's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with China Biotech Services Holdings , 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.