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

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.' 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. As with many other companies WuXi Biologics (Cayman) Inc. (HKG:2269) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for WuXi Biologics (Cayman)

How Much Debt Does WuXi Biologics (Cayman) Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 WuXi Biologics (Cayman) had CN¥3.01b of debt, an increase on CN¥2.88b, over one year. But on the other hand it also has CN¥8.69b in cash, leading to a CN¥5.68b net cash position.

A Look At WuXi Biologics (Cayman)'s Liabilities

According to the last reported balance sheet, WuXi Biologics (Cayman) had liabilities of CN¥8.14b due within 12 months, and liabilities of CN¥4.96b due beyond 12 months. Offsetting these obligations, it had cash of CN¥8.69b as well as receivables valued at CN¥5.86b due within 12 months. So it actually has CN¥1.46b more liquid assets than total liabilities.

Having regard to WuXi Biologics (Cayman)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥175.3b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, WuXi Biologics (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, WuXi Biologics (Cayman) grew its EBIT by 3.9% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if WuXi Biologics (Cayman) 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 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. During the last three years, WuXi Biologics (Cayman) burned a lot of cash. 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 we empathize with investors who find debt concerning, you should keep in mind that WuXi Biologics (Cayman) has net cash of CN¥5.68b, as well as more liquid assets than liabilities. And it also grew its EBIT by 3.9% over the last year. So we are not troubled with WuXi Biologics (Cayman)'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 WuXi Biologics (Cayman) , and understanding them should be part of your investment process.

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.