Weifu High-Technology Group (SZSE:000581) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Weifu High-Technology Group Co., Ltd. (SZSE:000581) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Weifu High-Technology Group

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¥1.74b of debt in September 2023, down from CN¥4.14b, one year before. But it also has CN¥4.81b in cash to offset that, meaning it has CN¥3.07b 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¥7.01b due within 12 months and liabilities of CN¥905.5m due beyond that. Offsetting these obligations, it had cash of CN¥4.81b as well as receivables valued at CN¥6.43b due within 12 months. So it actually has CN¥3.32b more liquid assets than total liabilities.

This surplus suggests that Weifu High-Technology Group is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Weifu High-Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Weifu High-Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to CN¥11b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Weifu High-Technology Group?

While Weifu High-Technology Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥174m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Weifu High-Technology Group .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.