Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Wangsu Science & Technology Co.,Ltd. (SZSE:300017) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Wangsu Science & TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that Wangsu Science & TechnologyLtd had debt of CN¥80.1m at the end of December 2023, a reduction from CN¥144.8m over a year. But it also has CN¥4.53b in cash to offset that, meaning it has CN¥4.45b net cash.

How Healthy Is Wangsu Science & TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Wangsu Science & TechnologyLtd had liabilities of CN¥1.10b due within a year, and liabilities of CN¥79.2m falling due after that. Offsetting this, it had CN¥4.53b in cash and CN¥1.11b in receivables that were due within 12 months. So it can boast CN¥4.46b more liquid assets than total liabilities.

This surplus suggests that Wangsu Science & TechnologyLtd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Wangsu Science & TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Wangsu Science & TechnologyLtd grew its EBIT by 146% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Wangsu Science & TechnologyLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Wangsu Science & TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Wangsu Science & TechnologyLtd actually produced more free cash flow than EBIT over the last two 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 Wangsu Science & TechnologyLtd has CN¥4.45b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 297% of that EBIT to free cash flow, bringing in CN¥705m. The bottom line is that we do not find Wangsu Science & TechnologyLtd's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Wangsu Science & TechnologyLtd has 1 warning sign we think you should be aware of.

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.