Is WenYi Trinity Technology (SHSE:600520) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, WenYi Trinity Technology Co., Ltd (SHSE:600520) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for WenYi Trinity Technology

What Is WenYi Trinity Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that WenYi Trinity Technology had CN¥35.0m of debt in September 2024, down from CN¥96.8m, one year before. However, it does have CN¥173.6m in cash offsetting this, leading to net cash of CN¥138.6m.

A Look At WenYi Trinity Technology's Liabilities

The latest balance sheet data shows that WenYi Trinity Technology had liabilities of CN¥183.9m due within a year, and liabilities of CN¥5.58m falling due after that. On the other hand, it had cash of CN¥173.6m and CN¥178.7m worth of receivables due within a year. So it can boast CN¥162.8m more liquid assets than total liabilities.

This short term liquidity is a sign that WenYi Trinity Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, WenYi Trinity Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, WenYi Trinity Technology grew its EBIT by 121% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is WenYi Trinity Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While WenYi Trinity Technology 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. Happily for any shareholders, WenYi Trinity Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case WenYi Trinity Technology has CN¥138.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 223% of that EBIT to free cash flow, bringing in CN¥55m. So is WenYi Trinity Technology'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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for WenYi Trinity Technology (of which 1 is potentially serious!) you should know about.

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.