Health Check: How Prudently Does Wuxi Double Elephant Micro Fibre MaterialLtd (SZSE:002395) Use Debt?

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. As with many other companies Wuxi Double Elephant Micro Fibre Material Co.,Ltd (SZSE:002395) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Wuxi Double Elephant Micro Fibre MaterialLtd

What Is Wuxi Double Elephant Micro Fibre MaterialLtd's Net Debt?

As you can see below, at the end of September 2023, Wuxi Double Elephant Micro Fibre MaterialLtd had CN¥143.5m of debt, up from CN¥82.1m a year ago. Click the image for more detail. However, it does have CN¥332.3m in cash offsetting this, leading to net cash of CN¥188.7m.

A Look At Wuxi Double Elephant Micro Fibre MaterialLtd's Liabilities

The latest balance sheet data shows that Wuxi Double Elephant Micro Fibre MaterialLtd had liabilities of CN¥690.8m due within a year, and liabilities of CN¥638.2m falling due after that. Offsetting this, it had CN¥332.3m in cash and CN¥379.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥617.2m.

Since publicly traded Wuxi Double Elephant Micro Fibre MaterialLtd shares are worth a total of CN¥3.62b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Wuxi Double Elephant Micro Fibre MaterialLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Wuxi Double Elephant Micro Fibre MaterialLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Wuxi Double Elephant Micro Fibre MaterialLtd reported revenue of CN¥1.5b, which is a gain of 6.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Wuxi Double Elephant Micro Fibre MaterialLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Wuxi Double Elephant Micro Fibre MaterialLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥188m and booked a CN¥19m accounting loss. Given it only has net cash of CN¥188.7m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 2 warning signs with Wuxi Double Elephant Micro Fibre MaterialLtd , and understanding them should be part of your investment process.

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.