Wuxi Double Elephant Micro Fibre MaterialLtd (SZSE:002395) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Wuxi Double Elephant Micro Fibre Material Co.,Ltd (SZSE:002395) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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. 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

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

The image below, which you can click on for greater detail, shows that Wuxi Double Elephant Micro Fibre MaterialLtd had debt of CN¥103.5m at the end of September 2024, a reduction from CN¥143.5m over a year. But it also has CN¥201.1m in cash to offset that, meaning it has CN¥97.6m net cash.

How Strong Is Wuxi Double Elephant Micro Fibre MaterialLtd's Balance Sheet?

According to the last reported balance sheet, Wuxi Double Elephant Micro Fibre MaterialLtd had liabilities of CN¥767.1m due within 12 months, and liabilities of CN¥632.3m due beyond 12 months. On the other hand, it had cash of CN¥201.1m and CN¥475.5m worth of receivables due within a year. So its liabilities total CN¥722.9m 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¥4.21b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Wuxi Double Elephant Micro Fibre MaterialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

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¥83m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Wuxi Double Elephant Micro Fibre MaterialLtd will need earnings to service that debt. 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 that may be a result of expenditure for growth, it does make the debt far 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¥97.6m. So we don't have any problem with Wuxi Double Elephant Micro Fibre MaterialLtd's use of debt. 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 Double Elephant Micro Fibre MaterialLtd has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.