These 4 Measures Indicate That Wuxi Paike New Materials TechnologyLtd (SHSE:605123) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Wuxi Paike New Materials Technology Co.,Ltd. (SHSE:605123) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Wuxi Paike New Materials TechnologyLtd

What Is Wuxi Paike New Materials TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Wuxi Paike New Materials TechnologyLtd had CN¥264.3m of debt in March 2024, down from CN¥460.3m, one year before. However, it does have CN¥1.70b in cash offsetting this, leading to net cash of CN¥1.44b.

A Look At Wuxi Paike New Materials TechnologyLtd's Liabilities

According to the last reported balance sheet, Wuxi Paike New Materials TechnologyLtd had liabilities of CN¥2.15b due within 12 months, and liabilities of CN¥287.2m due beyond 12 months. Offsetting this, it had CN¥1.70b in cash and CN¥2.02b in receivables that were due within 12 months. So it can boast CN¥1.28b more liquid assets than total liabilities.

This surplus suggests that Wuxi Paike New Materials TechnologyLtd is using debt in a way that is appears to be both safe and conservative. 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.

It is just as well that Wuxi Paike New Materials TechnologyLtd's load is not too heavy, because its EBIT was down 21% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Paike New Materials TechnologyLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 saw substantial negative free cash flow, in total. 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 Paike New Materials TechnologyLtd has CN¥1.44b in net cash and a decent-looking balance sheet. So we don't have any problem with Wuxi Paike New Materials TechnologyLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Wuxi Paike New Materials TechnologyLtd has 1 warning sign we think you should be aware of.

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.