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. As with many other companies WuXi Biologics (Cayman) Inc. (HKG:2269) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 WuXi Biologics (Cayman) had CN¥2.16b of debt in June 2024, down from CN¥3.01b, one year before. However, its balance sheet shows it holds CN¥9.53b in cash, so it actually has CN¥7.37b net cash.

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¥6.81b due within 12 months and liabilities of CN¥4.66b due beyond that. On the other hand, it had cash of CN¥9.53b and CN¥6.80b worth of receivables due within a year. So it can boast CN¥4.87b more liquid assets than total liabilities.

This short term liquidity is a sign that WuXi Biologics (Cayman) could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

But the bad news is that WuXi Biologics (Cayman) has seen its EBIT plunge 17% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine WuXi Biologics (Cayman)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, WuXi Biologics (Cayman) recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case WuXi Biologics (Cayman) has CN¥7.37b in net cash and a decent-looking balance sheet. So we are not troubled with WuXi Biologics (Cayman)'s debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for WuXi Biologics (Cayman) that 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.