The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that CanSino Biologics Inc. (HKG:6185) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does CanSino Biologics Carry?

The image below, which you can click on for greater detail, shows that CanSino Biologics had debt of CN¥2.09b at the end of September 2024, a reduction from CN¥2.36b over a year. But on the other hand it also has CN¥3.28b in cash, leading to a CN¥1.19b net cash position.

How Strong Is CanSino Biologics' Balance Sheet?

We can see from the most recent balance sheet that CanSino Biologics had liabilities of CN¥1.77b falling due within a year, and liabilities of CN¥1.15b due beyond that. Offsetting these obligations, it had cash of CN¥3.28b as well as receivables valued at CN¥687.3m due within 12 months. So it can boast CN¥1.04b 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. Simply put, the fact that CanSino Biologics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year CanSino Biologics wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to CN¥749m. With any luck the company will be able to grow its way to profitability.

So How Risky Is CanSino Biologics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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¥936m and booked a CN¥720m accounting loss. But the saving grace is the CN¥1.19b on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, CanSino Biologics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like CanSino Biologics I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.