WuXi Biologics (Cayman) (HKG:2269) Has A Pretty 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.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its 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¥2.16b of debt at June 2024, down from CN¥3.01b a year prior. But it also has CN¥9.53b in cash to offset that, meaning it has CN¥7.37b net cash.

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

We can see from the most recent balance sheet that WuXi Biologics (Cayman) had liabilities of CN¥6.81b falling due within a year, and liabilities of CN¥4.66b due beyond that. Offsetting this, it had CN¥9.53b in cash and CN¥6.80b in receivables that were due within 12 months. So it actually has 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.

On the other hand, WuXi Biologics (Cayman)'s EBIT dived 17%, over the last year. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Considering the last three years, WuXi Biologics (Cayman) actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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 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. Case in point: We've spotted 1 warning sign for WuXi Biologics (Cayman) 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.