We Think Wuxi Double Elephant Micro Fibre MaterialLtd (SZSE:002395) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Wuxi Double Elephant Micro Fibre Material Co.,Ltd (SZSE:002395) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wuxi Double Elephant Micro Fibre MaterialLtd

How Much Debt Does Wuxi Double Elephant Micro Fibre MaterialLtd Carry?

The image below, which you can click on for greater detail, shows that Wuxi Double Elephant Micro Fibre MaterialLtd had debt of CN¥104.9m at the end of March 2024, a reduction from CN¥115.0m over a year. However, its balance sheet shows it holds CN¥170.9m in cash, so it actually has CN¥66.0m net cash.

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

According to the last reported balance sheet, Wuxi Double Elephant Micro Fibre MaterialLtd had liabilities of CN¥679.8m due within 12 months, and liabilities of CN¥635.1m due beyond 12 months. Offsetting this, it had CN¥170.9m in cash and CN¥426.6m in receivables that were due within 12 months. So its liabilities total CN¥717.3m more than the combination of its cash and short-term receivables.

Since publicly traded Wuxi Double Elephant Micro Fibre MaterialLtd shares are worth a total of CN¥4.81b, 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.

Although Wuxi Double Elephant Micro Fibre MaterialLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥55m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wuxi Double Elephant Micro Fibre MaterialLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Wuxi Double Elephant Micro Fibre MaterialLtd 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. During the last year, Wuxi Double Elephant Micro Fibre MaterialLtd 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 Wuxi Double Elephant Micro Fibre MaterialLtd does have more liabilities than liquid assets, it also has net cash of CN¥66.0m. So we don't have any problem with Wuxi Double Elephant Micro Fibre MaterialLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Wuxi Double Elephant Micro Fibre MaterialLtd (2 are a bit unpleasant!) that you should be aware of before investing here.

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.