These 4 Measures Indicate That Wuxi Lead Intelligent EquipmentLTD (SZSE:300450) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Wuxi Lead Intelligent Equipment CO.,LTD. (SZSE:300450) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wuxi Lead Intelligent EquipmentLTD

What Is Wuxi Lead Intelligent EquipmentLTD's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Wuxi Lead Intelligent EquipmentLTD had debt of CN¥28.2m, up from none in one year. However, it does have CN¥2.98b in cash offsetting this, leading to net cash of CN¥2.95b.

How Strong Is Wuxi Lead Intelligent EquipmentLTD's Balance Sheet?

The latest balance sheet data shows that Wuxi Lead Intelligent EquipmentLTD had liabilities of CN¥24.3b due within a year, and liabilities of CN¥420.5m falling due after that. Offsetting these obligations, it had cash of CN¥2.98b as well as receivables valued at CN¥14.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.07b.

This deficit isn't so bad because Wuxi Lead Intelligent EquipmentLTD is worth CN¥32.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Wuxi Lead Intelligent EquipmentLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Wuxi Lead Intelligent EquipmentLTD's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wuxi Lead Intelligent EquipmentLTD can strengthen its balance sheet over time. 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. Wuxi Lead Intelligent EquipmentLTD 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. Considering the last three years, Wuxi Lead Intelligent EquipmentLTD actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While Wuxi Lead Intelligent EquipmentLTD does have more liabilities than liquid assets, it also has net cash of CN¥2.95b. So while Wuxi Lead Intelligent EquipmentLTD does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Wuxi Lead Intelligent EquipmentLTD is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.