Does WuXi Biologics (Cayman) (HKG:2269) Have A Healthy Balance Sheet?

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 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 WuXi Biologics (Cayman) Inc. (HKG:2269) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for WuXi Biologics (Cayman)

What Is WuXi Biologics (Cayman)'s Debt?

The chart below, which you can click on for greater detail, shows that WuXi Biologics (Cayman) had CN¥2.78b in debt in December 2022; about the same as the year before. However, it does have CN¥8.71b in cash offsetting this, leading to net cash of CN¥5.93b.

How Strong Is WuXi Biologics (Cayman)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WuXi Biologics (Cayman) had liabilities of CN¥9.32b due within 12 months and liabilities of CN¥4.03b due beyond that. Offsetting this, it had CN¥8.71b in cash and CN¥5.77b in receivables that were due within 12 months. So it can boast CN¥1.14b more liquid assets than total liabilities.

This state of affairs indicates that WuXi Biologics (Cayman)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥181.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that WuXi Biologics (Cayman) has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that WuXi Biologics (Cayman) has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WuXi Biologics (Cayman) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While WuXi Biologics (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. Over the last three years, WuXi Biologics (Cayman) saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case WuXi Biologics (Cayman) has CN¥5.93b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 37% over the last year. So we are not troubled with WuXi Biologics (Cayman)'s debt use. We'd be motivated to research the stock further if we found out that WuXi Biologics (Cayman) insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.