Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, CanSino Biologics Inc. (HKG: 6185) carries the debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is CanSino Biologics’ net debt?
You can click on the graph below for the historical figures, but it shows that as of June 2021, CanSino Biologics had a debt of CND 691.7 million, an increase from CN’s 140.2 million, on a year. But it also has CNS 6.71 billion in cash to make up for that, which means it has a net cash position of CN 6.02 billion.
How strong is CanSino Biologics’ balance sheet?
According to the latest published balance sheet, CanSino Biologics had a liability of CN ¥ 2.82b due within 12 months and a liability of CN ¥ 417.1m due beyond 12 months. In compensation for these obligations, he had cash of CNS 6.71 billion as well as receivables valued at CN 697.3 million due within 12 months. So he actually CN ¥ 4.17b Following liquid assets as total liabilities.
This surplus suggests that CanSino Biologics has a prudent balance sheet and could likely eliminate its debt without too much difficulty. Put simply, the fact that CanSino Biologics has more money than debt is probably a good indication that it can safely manage its debt.
It was also good to see that despite losing money on the EBIT line last year, CanSino Biologics made a difference in the past 12 months, delivering EBIT of CN 367 million. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine CanSino Biologics’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. CanSino Biologics may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its capacity. to manage debt. Over the past year, CanSino Biologics recorded substantial total negative free cash flow. While this may be the result of spending on growth, it makes debt much riskier.
While we agree with investors who find the debt of concern, you should keep in mind that CanSino Biologics has net cash of 6.02b CN, as well as more liquid assets than liabilities. We are therefore not concerned with the use of debt by CanSino Biologics. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, CanSino Biologics has 2 warning signs (and 1 that shouldn’t be ignored) we think you should be aware of.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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