Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Sansure Biotech Inc. (SHSE:688289) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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

What Is Sansure Biotech's Net Debt?

As you can see below, at the end of March 2024, Sansure Biotech had CN¥399.4m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥4.95b in cash offsetting this, leading to net cash of CN¥4.55b.

How Strong Is Sansure Biotech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sansure Biotech had liabilities of CN¥720.9m due within 12 months and liabilities of CN¥495.6m due beyond that. Offsetting this, it had CN¥4.95b in cash and CN¥696.8m in receivables that were due within 12 months. So it can boast CN¥4.43b more liquid assets than total liabilities.

This surplus strongly suggests that Sansure Biotech has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Sansure Biotech boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Sansure Biotech's load is not too heavy, because its EBIT was down 100% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sansure Biotech can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sansure Biotech 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. During the last three years, Sansure Biotech produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sansure Biotech has net cash of CN¥4.55b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -CN¥299m, being 67% of its EBIT. So is Sansure Biotech's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Sansure Biotech (including 1 which can't be ignored) .

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.

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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.

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