Is Shanghai Wanye EnterprisesLtd (SHSE:600641) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Shanghai Wanye Enterprises Co.,Ltd (SHSE:600641) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shanghai Wanye EnterprisesLtd

What Is Shanghai Wanye EnterprisesLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Shanghai Wanye EnterprisesLtd had debt of CN¥501.1m, up from CN¥365.0m in one year. But on the other hand it also has CN¥3.85b in cash, leading to a CN¥3.34b net cash position.

How Strong Is Shanghai Wanye EnterprisesLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Wanye EnterprisesLtd had liabilities of CN¥768.3m due within 12 months and liabilities of CN¥794.3m due beyond that. Offsetting these obligations, it had cash of CN¥3.85b as well as receivables valued at CN¥128.3m due within 12 months. So it actually has CN¥2.41b more liquid assets than total liabilities.

This surplus suggests that Shanghai Wanye EnterprisesLtd 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. Succinctly put, Shanghai Wanye EnterprisesLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shanghai Wanye EnterprisesLtd 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.

In the last year Shanghai Wanye EnterprisesLtd had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥939m. To be frank that doesn't bode well.

So How Risky Is Shanghai Wanye EnterprisesLtd?

While Shanghai Wanye EnterprisesLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥76m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Shanghai Wanye EnterprisesLtd that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com