Warren Buffett famously said, '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. As with many other companies Vcanbio Cell & Gene Engineering Corp., Ltd (SHSE:600645) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Vcanbio Cell & Gene Engineering's Debt?

The image below, which you can click on for greater detail, shows that Vcanbio Cell & Gene Engineering had debt of CN¥35.7m at the end of March 2024, a reduction from CN¥41.7m over a year. However, it does have CN¥1.52b in cash offsetting this, leading to net cash of CN¥1.48b.

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

We can see from the most recent balance sheet that Vcanbio Cell & Gene Engineering had liabilities of CN¥1.46b falling due within a year, and liabilities of CN¥126.4m due beyond that. Offsetting this, it had CN¥1.52b in cash and CN¥652.4m in receivables that were due within 12 months. So it can boast CN¥582.4m 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. Simply put, the fact that Vcanbio Cell & Gene Engineering has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Vcanbio Cell & Gene Engineering grew its EBIT by 6.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Vcanbio Cell & Gene Engineering's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 it is always sensible to investigate a company's debt, in this case Vcanbio Cell & Gene Engineering has CN¥1.48b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥205m, being 132% of its EBIT. So we don't think Vcanbio Cell & Gene Engineering's use of debt is risky. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com