Health Check: How Prudently Does Wayzim Technology (SHSE:688211) Use 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Wayzim Technology Co., Ltd. (SHSE:688211) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Wayzim Technology

What Is Wayzim Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Wayzim Technology had debt of CN¥20.0m, up from none in one year. However, its balance sheet shows it holds CN¥1.66b in cash, so it actually has CN¥1.64b net cash.

How Strong Is Wayzim Technology's Balance Sheet?

The latest balance sheet data shows that Wayzim Technology had liabilities of CN¥2.76b due within a year, and liabilities of CN¥216.8m falling due after that. Offsetting this, it had CN¥1.66b in cash and CN¥823.6m in receivables that were due within 12 months. So its liabilities total CN¥489.8m more than the combination of its cash and short-term receivables.

Since publicly traded Wayzim Technology shares are worth a total of CN¥3.52b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Wayzim Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wayzim Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Wayzim Technology reported revenue of CN¥2.5b, which is a gain of 4.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Wayzim Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Wayzim Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥48m of cash and made a loss of CN¥34m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.64b. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example - Wayzim 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.