WuXi Biologics (Cayman) (HKG:2269) Seems To Use Debt Quite Sensibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that WuXi Biologics (Cayman) Inc. (HKG:2269) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for WuXi Biologics (Cayman)

What Is WuXi Biologics (Cayman)'s Debt?

You can click the graphic below for the historical numbers, but it shows that WuXi Biologics (Cayman) had CN¥2.88b of debt in June 2022, down from CN¥3.23b, one year before. But it also has CN¥9.86b in cash to offset that, meaning it has CN¥6.99b net cash.

How Healthy 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. On the other hand, it had cash of CN¥9.86b and CN¥6.04b worth of receivables due within a year. So it actually has CN¥3.92b 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 it's very unlikely that the CN¥238.2b 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!

On top of that, WuXi Biologics (Cayman) grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. 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, 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 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 don't have any problem with WuXi Biologics (Cayman)'s use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that WuXi Biologics (Cayman) is showing 1 warning sign in our investment analysis , you should know about...

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.