The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Wangsu Science & Technology Co.,Ltd. (SZSE:300017) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Wangsu Science & TechnologyLtd

What Is Wangsu Science & TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Wangsu Science & TechnologyLtd had debt of CN¥582.8m, up from CN¥201.2m in one year. However, it does have CN¥6.36b in cash offsetting this, leading to net cash of CN¥5.78b.

A Look At Wangsu Science & TechnologyLtd's Liabilities

According to the last reported balance sheet, Wangsu Science & TechnologyLtd had liabilities of CN¥1.88b due within 12 months, and liabilities of CN¥101.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.36b as well as receivables valued at CN¥1.72b due within 12 months. So it can boast CN¥6.10b more liquid assets than total liabilities.

This excess liquidity is a great indication that Wangsu Science & TechnologyLtd's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wangsu Science & TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Wangsu Science & TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.8b, which is a fall of 7.6%. That's not what we would hope to see.

So How Risky Is Wangsu Science & TechnologyLtd?

Although Wangsu Science & TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥175m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wangsu Science & TechnologyLtd you should know about.

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.