Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Weifu High-Technology Group Co., Ltd. (SZSE:200581) does carry debt. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
View our latest analysis for Weifu High-Technology Group
How Much Debt Does Weifu High-Technology Group Carry?
As you can see below, Weifu High-Technology Group had CN¥2.89b of debt at June 2023, down from CN¥4.43b a year prior. However, its balance sheet shows it holds CN¥4.70b in cash, so it actually has CN¥1.80b net cash.
How Healthy Is Weifu High-Technology Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Weifu High-Technology Group had liabilities of CN¥7.96b due within 12 months and liabilities of CN¥1.07b due beyond that. On the other hand, it had cash of CN¥4.70b and CN¥8.28b worth of receivables due within a year. So it actually has CN¥3.95b more liquid assets than total liabilities.
This excess liquidity suggests that Weifu High-Technology Group is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Weifu High-Technology Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Weifu High-Technology Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
So How Risky Is Weifu High-Technology Group?
We have no doubt that loss making companies are, in general, riskier than profitable ones. 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¥44m and booked a CN¥24m accounting loss. Given it only has net cash of CN¥1.80b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Weifu High-Technology Group has 2 warning signs we think you should be aware of.
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.