Is Weifu High-Technology Group (SZSE:000581) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Weifu High-Technology Group Co., Ltd. (SZSE:000581) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Weifu High-Technology Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Weifu High-Technology Group had CN¥651.8m of debt in September 2024, down from CN¥1.74b, one year before. But it also has CN¥4.74b in cash to offset that, meaning it has CN¥4.08b net cash.

A Look At Weifu High-Technology Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Weifu High-Technology Group had liabilities of CN¥7.02b due within 12 months and liabilities of CN¥515.7m due beyond that. Offsetting this, it had CN¥4.74b in cash and CN¥6.35b in receivables that were due within 12 months. So it can boast CN¥3.55b more liquid assets than total liabilities.

It's good to see that Weifu High-Technology Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face 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.

See our latest analysis for Weifu High-Technology Group

Although Weifu High-Technology Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥420m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Weifu High-Technology Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Weifu High-Technology Group 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 year, Weifu High-Technology Group recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Weifu High-Technology Group has CN¥4.08b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in CN¥355m. So is Weifu High-Technology Group'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 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.