Is WuXi XDC Cayman (HKG:2268) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies WuXi XDC Cayman Inc. (HKG:2268) makes use of debt. But the real question is whether this debt is making the company risky.

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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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is WuXi XDC Cayman's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 WuXi XDC Cayman had CN¥478.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥3.97b in cash, so it actually has CN¥3.50b net cash.

A Look At WuXi XDC Cayman's Liabilities

The latest balance sheet data shows that WuXi XDC Cayman had liabilities of CN¥2.47b due within a year, and liabilities of CN¥18.2m falling due after that. Offsetting these obligations, it had cash of CN¥3.97b as well as receivables valued at CN¥1.87b due within 12 months. So it actually has CN¥3.36b more liquid assets than total liabilities.

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

Check out our latest analysis for WuXi XDC Cayman

Even more impressive was the fact that WuXi XDC Cayman grew its EBIT by 150% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine WuXi XDC Cayman's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While WuXi XDC Cayman 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. During the last three years, WuXi XDC Cayman burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case WuXi XDC Cayman has CN¥3.50b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 150% over the last year. So we are not troubled with WuXi XDC Cayman's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for WuXi XDC Cayman (1 shouldn't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.