Wuxi Lead Intelligent EquipmentLTD (SZSE:300450) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Wuxi Lead Intelligent Equipment CO.,LTD. (SZSE:300450) does use debt in its business. But should shareholders be worried about its use of debt?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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 September 2024 Wuxi Lead Intelligent EquipmentLTD had debt of CN¥3.31b, up from none in one year. On the flip side, it has CN¥3.08b in cash leading to net debt of about CN¥227.7m.

A Look At Wuxi Lead Intelligent EquipmentLTD's Liabilities

Zooming in on the latest balance sheet data, we can see that Wuxi Lead Intelligent EquipmentLTD had liabilities of CN¥21.9b due within 12 months and liabilities of CN¥657.1m due beyond that. On the other hand, it had cash of CN¥3.08b and CN¥11.7b worth of receivables due within a year. So its liabilities total CN¥7.78b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Wuxi Lead Intelligent EquipmentLTD is worth CN¥30.9b, 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. But either way, Wuxi Lead Intelligent EquipmentLTD has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Wuxi Lead Intelligent EquipmentLTD made a loss at the EBIT level, and saw its revenue drop to CN¥13b, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While Wuxi Lead Intelligent EquipmentLTD's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥84m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥2.5b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Wuxi Lead Intelligent EquipmentLTD has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.