Is CanSino Biologics (HKG:6185) Using Too Much Debt?

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.' 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. Importantly, CanSino Biologics Inc. (HKG:6185) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for CanSino Biologics

What Is CanSino Biologics's Debt?

As you can see below, at the end of March 2022, CanSino Biologics had CN¥1.31b of debt, up from CN¥315.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥7.12b in cash, so it actually has CN¥5.81b net cash.

How Strong Is CanSino Biologics' Balance Sheet?

We can see from the most recent balance sheet that CanSino Biologics had liabilities of CN¥2.77b falling due within a year, and liabilities of CN¥579.4m due beyond that. On the other hand, it had cash of CN¥7.12b and CN¥355.2m worth of receivables due within a year. So it can boast CN¥4.12b 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!

Although CanSino Biologics made a loss at the EBIT level, last year, it was also good to see that it generated CN¥1.9b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CanSino Biologics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While CanSino Biologics 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. Over the last year, CanSino Biologics reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that CanSino Biologics has net cash of CN¥5.81b, as well as more liquid assets than liabilities. So we don't have any problem with CanSino Biologics's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that CanSino Biologics is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.