CanSino Biologics (HKG:6185) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that CanSino Biologics Inc. (HKG:6185) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CanSino Biologics

What Is CanSino Biologics's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 CanSino Biologics had debt of CN¥2.52b, up from CN¥1.31b in one year. But on the other hand it also has CN¥5.38b in cash, leading to a CN¥2.86b net cash position.

How Healthy Is CanSino Biologics' Balance Sheet?

The latest balance sheet data shows that CanSino Biologics had liabilities of CN¥2.62b due within a year, and liabilities of CN¥1.52b falling due after that. On the other hand, it had cash of CN¥5.38b and CN¥871.3m worth of receivables due within a year. So it actually has CN¥2.11b more liquid assets than total liabilities.

This surplus suggests that CanSino Biologics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CanSino Biologics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CanSino Biologics'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.

In the last year CanSino Biologics had a loss before interest and tax, and actually shrunk its revenue by 85%, to CN¥636m. To be frank that doesn't bode well.

So How Risky Is CanSino Biologics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that CanSino Biologics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥2.7b and booked a CN¥1.2b accounting loss. But at least it has CN¥2.86b on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 1 warning sign for CanSino Biologics you should be aware of.

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.