Is Wecome Intelligent Manufacturing (SHSE:603070) Using Too Much Debt?

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.' 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. As with many other companies Wecome Intelligent Manufacturing Co., Ltd. (SHSE:603070) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Wecome Intelligent Manufacturing

How Much Debt Does Wecome Intelligent Manufacturing Carry?

The image below, which you can click on for greater detail, shows that Wecome Intelligent Manufacturing had debt of CN¥237.5m at the end of September 2024, a reduction from CN¥443.2m over a year. However, it does have CN¥574.2m in cash offsetting this, leading to net cash of CN¥336.7m.

How Healthy Is Wecome Intelligent Manufacturing's Balance Sheet?

We can see from the most recent balance sheet that Wecome Intelligent Manufacturing had liabilities of CN¥928.1m falling due within a year, and liabilities of CN¥3.73m due beyond that. On the other hand, it had cash of CN¥574.2m and CN¥1.32b worth of receivables due within a year. So it can boast CN¥963.0m more liquid assets than total liabilities.

This excess liquidity suggests that Wecome Intelligent Manufacturing is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Wecome Intelligent Manufacturing has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Wecome Intelligent Manufacturing if management cannot prevent a repeat of the 56% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wecome Intelligent Manufacturing'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. Wecome Intelligent Manufacturing 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. Looking at the most recent three years, Wecome Intelligent Manufacturing recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wecome Intelligent Manufacturing has CN¥336.7m in net cash and a decent-looking balance sheet. So we are not troubled with Wecome Intelligent Manufacturing's debt use. 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, we've discovered 3 warning signs for Wecome Intelligent Manufacturing (1 shouldn't be ignored!) that you should be aware of before investing here.

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.