Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, CanSino Biologics Inc. (HKG:6185) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 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.
What Is CanSino Biologics's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2021 CanSino Biologics had debt of CN¥1.17b, up from CN¥130.2m in one year. However, its balance sheet shows it holds CN¥7.12b in cash, so it actually has CN¥5.95b net cash.
How Healthy Is CanSino Biologics' Balance Sheet?
We can see from the most recent balance sheet that CanSino Biologics had liabilities of CN¥3.09b falling due within a year, and liabilities of CN¥373.3m due beyond that. On the other hand, it had cash of CN¥7.12b and CN¥488.3m worth of receivables due within a year. So it can boast CN¥4.15b 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.
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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last year, CanSino Biologics basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.
While it is always sensible to investigate a company's debt, in this case CanSino Biologics has CN¥5.95b in net cash and a decent-looking balance sheet. So we don't have any problem with CanSino Biologics's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for CanSino Biologics 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.
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.