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, Wanxiang Qianchao Co.,Ltd. (SZSE:000559) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Wanxiang QianchaoLtd's Debt?
As you can see below, at the end of March 2024, Wanxiang QianchaoLtd had CN¥4.55b of debt, up from CN¥4.05b a year ago. Click the image for more detail. But on the other hand it also has CN¥4.85b in cash, leading to a CN¥302.4m net cash position.
A Look At Wanxiang QianchaoLtd's Liabilities
We can see from the most recent balance sheet that Wanxiang QianchaoLtd had liabilities of CN¥9.62b falling due within a year, and liabilities of CN¥1.87b due beyond that. Offsetting this, it had CN¥4.85b in cash and CN¥3.70b in receivables that were due within 12 months. So it has liabilities totalling CN¥2.94b more than its cash and near-term receivables, combined.
Given Wanxiang QianchaoLtd has a market capitalization of CN¥17.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Wanxiang QianchaoLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Wanxiang QianchaoLtd grew its EBIT by 75% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wanxiang QianchaoLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Wanxiang QianchaoLtd 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. Over the last three years, Wanxiang QianchaoLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While Wanxiang QianchaoLtd does have more liabilities than liquid assets, it also has net cash of CN¥302.4m. And it impressed us with free cash flow of CN¥625m, being 122% of its EBIT. So we don't think Wanxiang QianchaoLtd's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Wanxiang QianchaoLtd you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.