Does CanSino Biologics (HKG:6185) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 CanSino Biologics Inc. (HKG:6185) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for CanSino Biologics

What Is CanSino Biologics's Net Debt?

As you can see below, at the end of September 2022, CanSino Biologics had CN¥2.22b of debt, up from CN¥968.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥6.42b in cash, so it actually has CN¥4.20b net cash.

A Look At CanSino Biologics' Liabilities

According to the last reported balance sheet, CanSino Biologics had liabilities of CN¥2.77b due within 12 months, and liabilities of CN¥1.01b due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.42b as well as receivables valued at CN¥336.0m due within 12 months. So it can boast CN¥2.97b more liquid assets than total liabilities.

This short term liquidity is a sign that CanSino Biologics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CanSino Biologics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CanSino Biologics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year CanSino Biologics had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥1.9b. To be frank that doesn't bode well.

So How Risky Is CanSino Biologics?

Although CanSino Biologics had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥106m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for CanSino Biologics (2 make us uncomfortable!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.