These 4 Measures Indicate That WuXi Biologics (Cayman) (HKG:2269) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, WuXi Biologics (Cayman) Inc. (HKG:2269) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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¥2.81b in debt in June 2023; about the same as the year before. But it also has CN¥8.69b in cash to offset that, meaning it has CN¥5.88b net cash.

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 this, it had CN¥8.69b in cash and CN¥5.86b in receivables that were due within 12 months. So it actually has CN¥1.46b 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¥175.2b company is struggling for cash, we still think it's worth monitoring its 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 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¥5.88b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 3.9% in the last twelve months. So we don't have any problem with WuXi Biologics (Cayman)'s use of debt. 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 example, we've discovered 1 warning sign for WuXi Biologics (Cayman) that you should be aware of before investing here.

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.