Is CanSino Biologics (HKG:6185) Weighed On By Its Debt Load?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that CanSino Biologics Inc. (HKG:6185) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for CanSino Biologics
How Much Debt Does CanSino Biologics Carry?
As you can see below, CanSino Biologics had CN¥150.2m of debt, at December 2019, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥754.8m in cash to offset that, meaning it has CN¥604.6m net cash.
How Strong Is CanSino Biologics's Balance Sheet?
We can see from the most recent balance sheet that CanSino Biologics had liabilities of CN¥124.3m falling due within a year, and liabilities of CN¥189.7m due beyond that. Offsetting these obligations, it had cash of CN¥754.8m as well as receivables valued at CN¥23.1m due within 12 months. So it actually has CN¥463.9m more liquid assets than total liabilities.
This state of affairs indicates that CanSino Biologics's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥31.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, CanSino Biologics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, CanSino Biologics reported revenue of CN¥16m, which is a gain of 80%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is CanSino Biologics?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year CanSino Biologics had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through CN¥287m of cash and made a loss of CN¥157m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥604.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. CanSino Biologics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for CanSino Biologics that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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