Does Wuxi Xinhongye Wire & Cable (SZSE:301310) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Wuxi Xinhongye Wire & Cable Co., Ltd. (SZSE:301310) does use debt in its business. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wuxi Xinhongye Wire & Cable

What Is Wuxi Xinhongye Wire & Cable's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Wuxi Xinhongye Wire & Cable had CN¥121.5m of debt, an increase on CN¥29.8m, over one year. However, it does have CN¥1.03b in cash offsetting this, leading to net cash of CN¥906.6m.

How Strong Is Wuxi Xinhongye Wire & Cable's Balance Sheet?

The latest balance sheet data shows that Wuxi Xinhongye Wire & Cable had liabilities of CN¥1.65b due within a year, and liabilities of CN¥58.2m falling due after that. On the other hand, it had cash of CN¥1.03b and CN¥1.61b worth of receivables due within a year. So it actually has CN¥924.3m more liquid assets than total liabilities.

This surplus suggests that Wuxi Xinhongye Wire & Cable is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Wuxi Xinhongye Wire & Cable has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Wuxi Xinhongye Wire & Cable if management cannot prevent a repeat of the 48% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Wuxi Xinhongye Wire & Cable 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. While Wuxi Xinhongye Wire & Cable 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. During the last three years, Wuxi Xinhongye Wire & Cable burned a lot of cash. 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 investigate a company's debt, in this case Wuxi Xinhongye Wire & Cable has CN¥906.6m in net cash and a decent-looking balance sheet. So we are not troubled with Wuxi Xinhongye Wire & Cable's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Wuxi Xinhongye Wire & Cable (1 can't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.