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.' 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. We can see that Weifu High-Technology Group Co., Ltd. (SZSE:200581) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Weifu High-Technology Group
What Is Weifu High-Technology Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2023 Weifu High-Technology Group had CN¥4.01b of debt, an increase on CN¥1.50b, over one year. But on the other hand it also has CN¥5.43b in cash, leading to a CN¥1.42b net cash position.
A Look At Weifu High-Technology Group's Liabilities
We can see from the most recent balance sheet that Weifu High-Technology Group had liabilities of CN¥9.41b falling due within a year, and liabilities of CN¥698.8m due beyond that. On the other hand, it had cash of CN¥5.43b and CN¥6.17b worth of receivables due within a year. So it can boast CN¥1.49b more liquid assets than total liabilities.
This short term liquidity is a sign that Weifu High-Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Weifu High-Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Weifu High-Technology Group'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.
Over 12 months, Weifu High-Technology Group made a loss at the EBIT level, and saw its revenue drop to CN¥12b, which is a fall of 13%. That's not what we would hope to see.
So How Risky Is Weifu High-Technology Group?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Weifu High-Technology Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥2.4b and booked a CN¥187m accounting loss. Given it only has net cash of CN¥1.42b, the company may need to raise more capital if it doesn't reach break-even soon. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Weifu High-Technology Group is showing 1 warning sign in our investment analysis , you should know about...
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.