David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Vcanbio Cell & Gene Engineering Corp., Ltd (SHSE:600645) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Vcanbio Cell & Gene Engineering's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Vcanbio Cell & Gene Engineering had CN¥40.8m of debt, an increase on CN¥11.0m, over one year. But it also has CN¥1.44b in cash to offset that, meaning it has CN¥1.40b net cash.

How Strong Is Vcanbio Cell & Gene Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vcanbio Cell & Gene Engineering had liabilities of CN¥1.48b due within 12 months and liabilities of CN¥118.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.44b as well as receivables valued at CN¥702.4m due within 12 months. So it actually has CN¥540.2m more liquid assets than total liabilities.

This surplus suggests that Vcanbio Cell & Gene Engineering has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Vcanbio Cell & Gene Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Vcanbio Cell & Gene Engineering's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vcanbio Cell & Gene Engineering 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 company can only pay off debt with cold hard cash, not accounting profits. Vcanbio Cell & Gene Engineering 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. Happily for any shareholders, Vcanbio Cell & Gene Engineering actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Vcanbio Cell & Gene Engineering has net cash of CN¥1.40b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥209m, being 131% of its EBIT. So we are not troubled with Vcanbio Cell & Gene Engineering's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Vcanbio Cell & Gene Engineering's earnings per share history for free.

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.