Wuxi Xinhongye Wire & Cable (SZSE:301310) Seems To Use Debt Quite Sensibly

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. Importantly, Wuxi Xinhongye Wire & Cable Co., Ltd. (SZSE:301310) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

How Much Debt Does Wuxi Xinhongye Wire & Cable Carry?

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, its balance sheet shows it holds CN¥1.03b in cash, so it actually has CN¥906.6m net cash.

How Healthy 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. Offsetting these obligations, it had cash of CN¥1.03b as well as receivables valued at CN¥1.61b due within 12 months. So it can boast CN¥924.3m more liquid assets than total liabilities.

This excess liquidity suggests that Wuxi Xinhongye Wire & Cable is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble 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.

See our latest analysis for Wuxi Xinhongye Wire & Cable

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. 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 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Wuxi Xinhongye Wire & Cable has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.