Here's Why Wuxi Paike New Materials TechnologyLtd (SHSE:605123) Can Manage Its Debt Responsibly

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.' 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 Paike New Materials Technology Co.,Ltd. (SHSE:605123) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 Paike New Materials TechnologyLtd

What Is Wuxi Paike New Materials TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Wuxi Paike New Materials TechnologyLtd had debt of CN¥477.9m, up from CN¥420.3m in one year. But on the other hand it also has CN¥2.11b in cash, leading to a CN¥1.63b net cash position.

How Strong Is Wuxi Paike New Materials TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Wuxi Paike New Materials TechnologyLtd had liabilities of CN¥2.31b due within a year, and liabilities of CN¥334.0m falling due after that. Offsetting this, it had CN¥2.11b in cash and CN¥2.05b in receivables that were due within 12 months. So it can boast CN¥1.52b more liquid assets than total liabilities.

It's good to see that Wuxi Paike New Materials TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Wuxi Paike New Materials TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Wuxi Paike New Materials TechnologyLtd's saving grace is its low debt levels, because its EBIT has tanked 48% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Paike New Materials TechnologyLtd'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 company can only pay off debt with cold hard cash, not accounting profits. Wuxi Paike New Materials TechnologyLtd 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 three years, Wuxi Paike New Materials TechnologyLtd recorded negative free cash flow, in total. 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 it is always sensible to investigate a company's debt, in this case Wuxi Paike New Materials TechnologyLtd has CN¥1.63b in net cash and a decent-looking balance sheet. So we are not troubled with Wuxi Paike New Materials TechnologyLtd's debt use. 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. For example, we've discovered 2 warning signs for Wuxi Paike New Materials TechnologyLtd 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.