Here's Why AIM Vaccine (HKG:6660) Can Afford Some Debt

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.' 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 note that AIM Vaccine Co., Ltd. (HKG:6660) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AIM Vaccine

How Much Debt Does AIM Vaccine Carry?

As you can see below, at the end of June 2024, AIM Vaccine had CN¥1.94b of debt, up from CN¥1.64b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥655.3m, its net debt is less, at about CN¥1.28b.

How Strong Is AIM Vaccine's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AIM Vaccine had liabilities of CN¥2.91b due within 12 months and liabilities of CN¥665.1m due beyond that. Offsetting this, it had CN¥655.3m in cash and CN¥1.13b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.80b.

This deficit isn't so bad because AIM Vaccine is worth CN¥7.95b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AIM Vaccine's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, AIM Vaccine made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 2.4%. We would much prefer see growth.

Caveat Emptor

Importantly, AIM Vaccine had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥1.8b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥276m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for AIM Vaccine you should know about.

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.