Is CanSino Biologics (HKG:6185) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies CanSino Biologics Inc. (HKG:6185) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CanSino Biologics

How Much Debt Does CanSino Biologics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 CanSino Biologics had CN¥2.36b of debt, an increase on CN¥2.22b, over one year. But on the other hand it also has CN¥4.34b in cash, leading to a CN¥1.98b net cash position.

A Look At CanSino Biologics' Liabilities

According to the last reported balance sheet, CanSino Biologics had liabilities of CN¥2.47b due within 12 months, and liabilities of CN¥1.35b due beyond 12 months. Offsetting this, it had CN¥4.34b in cash and CN¥660.7m in receivables that were due within 12 months. So it can boast CN¥1.19b more liquid assets than total liabilities.

It's good to see that CanSino Biologics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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 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.

Over 12 months, CanSino Biologics made a loss at the EBIT level, and saw its revenue drop to CN¥503m, which is a fall of 74%. To be frank that doesn't bode well.

So How Risky Is CanSino Biologics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months CanSino Biologics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥1.9b and booked a CN¥1.4b accounting loss. Given it only has net cash of CN¥1.98b, the company may need to raise more capital if it doesn't reach break-even soon. 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. 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. To that end, you should learn about the 2 warning signs we've spotted with CanSino Biologics (including 1 which is potentially serious) .

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.