Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Walvax Biotechnology Co., Ltd. (SZSE:300142) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Walvax Biotechnology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Walvax Biotechnology had debt of CN¥712.0m, up from CN¥516.8m in one year. But on the other hand it also has CN¥3.62b in cash, leading to a CN¥2.91b net cash position.

How Strong Is Walvax Biotechnology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Walvax Biotechnology had liabilities of CN¥2.39b due within 12 months and liabilities of CN¥883.7m due beyond that. Offsetting this, it had CN¥3.62b in cash and CN¥2.80b in receivables that were due within 12 months. So it actually has CN¥3.15b more liquid assets than total liabilities.

This surplus suggests that Walvax Biotechnology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Walvax Biotechnology has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Walvax Biotechnology's load is not too heavy, because its EBIT was down 63% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Walvax Biotechnology'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Walvax Biotechnology 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. Looking at the most recent three years, Walvax Biotechnology recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Walvax Biotechnology has net cash of CN¥2.91b, as well as more liquid assets than liabilities. So we are not troubled with Walvax Biotechnology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Walvax Biotechnology .

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.