Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, CanSino Biologics Inc. (HKG:6185) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CanSino Biologics

What Is CanSino Biologics's Net Debt?

As you can see below, at the end of September 2023, CanSino Biologics had CN¥2.36b of debt, up from CN¥2.22b a year ago. Click the image for more detail. But on the other hand it also has CN¥4.34b in cash, leading to a CN¥1.98b net cash position.

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¥2.47b due within 12 months and liabilities of CN¥1.35b due beyond that. On the other hand, it had cash of CN¥4.34b and CN¥660.7m worth of receivables due within a year. So it actually has CN¥1.19b more liquid assets than total liabilities.

This short term liquidity is a sign that CanSino Biologics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CanSino Biologics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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%. That makes us nervous, to say the least.

So How Risky Is CanSino Biologics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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. But at least it has CN¥1.98b on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 1 warning sign for CanSino Biologics that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.