Is WuXi Biologics (Cayman) (HKG:2269) A Risky Investment?

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. Importantly, WuXi Biologics (Cayman) Inc. (HKG:2269) does carry debt. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for WuXi Biologics (Cayman)

How Much Debt Does WuXi Biologics (Cayman) Carry?

As you can see below, WuXi Biologics (Cayman) had CN¥2.88b of debt at June 2022, down from CN¥3.23b a year prior. However, it does have CN¥9.86b in cash offsetting this, leading to net cash of CN¥6.99b.

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

According to the last reported balance sheet, WuXi Biologics (Cayman) had liabilities of CN¥9.00b due within 12 months, and liabilities of CN¥3.00b due beyond 12 months. Offsetting these obligations, it had cash of CN¥9.86b as well as receivables valued at CN¥6.04b due within 12 months. So it can boast CN¥3.92b 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 while it's hard to imagine that the CN¥209.9b 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 44%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. WuXi Biologics (Cayman) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, WuXi Biologics (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 Biologics (Cayman) has CN¥6.99b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 44% 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. For example - WuXi Biologics (Cayman) has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.