Does Wanxiang QianchaoLtd (SZSE:000559) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies Wanxiang Qianchao Co.,Ltd. (SZSE:000559) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Wanxiang QianchaoLtd

What Is Wanxiang QianchaoLtd's Net Debt?

As you can see below, at the end of September 2024, Wanxiang QianchaoLtd had CN¥5.61b of debt, up from CN¥4.44b a year ago. Click the image for more detail. But on the other hand it also has CN¥6.12b in cash, leading to a CN¥509.1m net cash position.

A Look At Wanxiang QianchaoLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Wanxiang QianchaoLtd had liabilities of CN¥11.0b due within 12 months and liabilities of CN¥1.98b due beyond that. Offsetting these obligations, it had cash of CN¥6.12b as well as receivables valued at CN¥3.96b due within 12 months. So its liabilities total CN¥2.93b more than the combination of its cash and short-term receivables.

Of course, Wanxiang QianchaoLtd has a market capitalization of CN¥22.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 73% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Wanxiang QianchaoLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Wanxiang QianchaoLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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

Although Wanxiang QianchaoLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥509.1m. And it impressed us with free cash flow of CN¥1.1b, being 120% of its EBIT. So is Wanxiang QianchaoLtd's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Wanxiang QianchaoLtd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.