We Think Wecome Intelligent Manufacturing (SHSE:603070) Can Stay On Top Of Its 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.' 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, Wecome Intelligent Manufacturing Co., Ltd. (SHSE:603070) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wecome Intelligent Manufacturing

What Is Wecome Intelligent Manufacturing's Net Debt?

As you can see below, at the end of March 2024, Wecome Intelligent Manufacturing had CN¥535.9m of debt, up from CN¥514.7m a year ago. Click the image for more detail. But on the other hand it also has CN¥977.1m in cash, leading to a CN¥441.2m net cash position.

A Look At Wecome Intelligent Manufacturing's Liabilities

Zooming in on the latest balance sheet data, we can see that Wecome Intelligent Manufacturing had liabilities of CN¥1.15b due within 12 months and liabilities of CN¥54.4m due beyond that. Offsetting these obligations, it had cash of CN¥977.1m as well as receivables valued at CN¥1.22b due within 12 months. So it can boast CN¥992.9m 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.

It is just as well that Wecome Intelligent Manufacturing's load is not too heavy, because its EBIT was down 29% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wecome Intelligent Manufacturing will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wecome Intelligent Manufacturing has net cash of CN¥441.2m, as well as more liquid assets than liabilities. So we don't have any problem with Wecome Intelligent Manufacturing's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Wecome Intelligent Manufacturing 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com