WenYi Trinity Technology (SHSE:600520) Seems To Use Debt Rather Sparingly

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 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. Importantly, WenYi Trinity Technology Co., Ltd (SHSE:600520) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for WenYi Trinity Technology

What Is WenYi Trinity Technology's 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, its balance sheet shows it holds CN¥173.6m in cash, so it actually has CN¥138.6m net cash.

How Healthy Is WenYi Trinity Technology's Balance Sheet?

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. Offsetting these obligations, it had cash of CN¥173.6m as well as receivables valued at CN¥178.7m due within 12 months. So it actually has CN¥162.8m more liquid assets than total liabilities.

This surplus suggests that WenYi Trinity Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that WenYi Trinity Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that WenYi Trinity Technology grew its EBIT by 121% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since WenYi Trinity Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - WenYi Trinity Technology has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.