Is Wanxiang QianchaoLtd (SZSE:000559) Using Too Much Debt?

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

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Wanxiang QianchaoLtd

What Is Wanxiang QianchaoLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Wanxiang QianchaoLtd had debt of CN¥4.55b, up from CN¥4.05b in one year. 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

According to the last reported balance sheet, Wanxiang QianchaoLtd had liabilities of CN¥9.62b due within 12 months, and liabilities of CN¥1.87b due beyond 12 months. On the other hand, it had cash of CN¥4.85b and CN¥3.70b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.94b.

This deficit isn't so bad because Wanxiang QianchaoLtd is worth CN¥14.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

In addition to that, we're happy to report that Wanxiang QianchaoLtd has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wanxiang QianchaoLtd will need earnings to service that debt. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Wanxiang QianchaoLtd does have more liabilities than liquid assets, it also has net cash of CN¥302.4m. The cherry on top was that in converted 122% of that EBIT to free cash flow, bringing in CN¥625m. So is Wanxiang QianchaoLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Wanxiang QianchaoLtd you should be aware of.

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.