Is Weihai Guangwei Composites (SZSE:300699) Using Too Much Debt?

Warren Buffett famously said, '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 Weihai Guangwei Composites Co., Ltd. (SZSE:300699) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Weihai Guangwei Composites

How Much Debt Does Weihai Guangwei Composites Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Weihai Guangwei Composites had debt of CN¥776.0m, up from CN¥240.4m in one year. But it also has CN¥1.13b in cash to offset that, meaning it has CN¥357.9m net cash.

A Look At Weihai Guangwei Composites' Liabilities

Zooming in on the latest balance sheet data, we can see that Weihai Guangwei Composites had liabilities of CN¥983.3m due within 12 months and liabilities of CN¥819.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.13b as well as receivables valued at CN¥1.95b due within 12 months. So it actually has CN¥1.28b more liquid assets than total liabilities.

This short term liquidity is a sign that Weihai Guangwei Composites could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Weihai Guangwei Composites has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Weihai Guangwei Composites saw its EBIT drop by 6.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Weihai Guangwei Composites's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Weihai Guangwei Composites has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Weihai Guangwei Composites reported free cash flow worth 10.0% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Weihai Guangwei Composites has CN¥357.9m in net cash and a decent-looking balance sheet. So we are not troubled with Weihai Guangwei Composites's debt use. 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. Be aware that Weihai Guangwei Composites is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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.