Is Wuxi HyatechLtd (SHSE:688510) A Risky Investment?

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. As with many other companies Wuxi Hyatech Co.,Ltd. (SHSE:688510) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Wuxi HyatechLtd

What Is Wuxi HyatechLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Wuxi HyatechLtd had CN¥181.1m of debt, an increase on CN¥122.0m, over one year. However, its balance sheet shows it holds CN¥200.7m in cash, so it actually has CN¥19.6m net cash.

A Look At Wuxi HyatechLtd's Liabilities

According to the last reported balance sheet, Wuxi HyatechLtd had liabilities of CN¥473.4m due within 12 months, and liabilities of CN¥70.9m due beyond 12 months. Offsetting this, it had CN¥200.7m in cash and CN¥297.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥45.8m more than its cash and near-term receivables, combined.

This state of affairs indicates that Wuxi HyatechLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.47b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Wuxi HyatechLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Wuxi HyatechLtd grew its EBIT by 315% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wuxi HyatechLtd'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Wuxi HyatechLtd 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. Over the last two years, Wuxi HyatechLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Wuxi HyatechLtd has CN¥19.6m in net cash. And it impressed us with its EBIT growth of 315% over the last year. So we don't have any problem with Wuxi HyatechLtd's use of debt. 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. Be aware that Wuxi HyatechLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

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