Warom Technology (SHSE:603855) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Warom Technology Incorporated Company (SHSE:603855) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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.

Check out our latest analysis for Warom Technology

How Much Debt Does Warom Technology Carry?

As you can see below, at the end of March 2024, Warom Technology had CN¥141.6m of debt, up from CN¥110.4m a year ago. Click the image for more detail. But it also has CN¥984.8m in cash to offset that, meaning it has CN¥843.1m net cash.

How Healthy Is Warom Technology's Balance Sheet?

We can see from the most recent balance sheet that Warom Technology had liabilities of CN¥2.49b falling due within a year, and liabilities of CN¥25.2m due beyond that. On the other hand, it had cash of CN¥984.8m and CN¥1.87b worth of receivables due within a year. So it actually has CN¥343.4m more liquid assets than total liabilities.

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

Also positive, Warom Technology grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Warom Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Warom 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. Over the most recent three years, Warom Technology recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Warom Technology has CN¥843.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 29% over the last year. So we don't think Warom Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Warom Technology .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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