David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies CanSino Biologics Inc. (HKG:6185) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View 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, it does have CN¥7.12b in cash offsetting this, leading to net cash of CN¥5.81b.

How Strong Is CanSino Biologics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CanSino Biologics had liabilities of CN¥2.77b due within 12 months and liabilities of CN¥579.4m due beyond that. Offsetting this, it had CN¥7.12b in cash and CN¥355.2m in receivables that were due within 12 months. So it actually has CN¥4.12b more liquid assets than total liabilities.

This surplus suggests that CanSino Biologics is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CanSino Biologics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. CanSino Biologics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last year, CanSino Biologics created free cash flow amounting to 17% of its EBIT, an uninspiring performance. 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 are not troubled with CanSino Biologics's debt use. 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. We've identified 2 warning signs with CanSino Biologics (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.