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. 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 CanSino Biologics Inc. (HKG:6185) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CanSino Biologics

What Is CanSino Biologics's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2019 CanSino Biologics had debt of CN¥150.0m, up from CN¥108.3m in one year. However, it does have CN¥906.5m in cash offsetting this, leading to net cash of CN¥756.5m.

A Look At CanSino Biologics's Liabilities

The latest balance sheet data shows that CanSino Biologics had liabilities of CN¥86.6m due within a year, and liabilities of CN¥202.5m falling due after that. Offsetting these obligations, it had cash of CN¥906.5m as well as receivables valued at CN¥10.8m due within 12 months. So it actually has CN¥628.2m 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CanSino Biologics 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.

While it hasn't made a profit, at least CanSino Biologics booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is CanSino Biologics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that CanSino Biologics had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through CN¥282m of cash and made a loss of CN¥156m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥756.5m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how CanSino Biologics's profit, revenue, and operating cashflow have changed over the last few years.