Is Shanghai Wanye EnterprisesLtd (SHSE:600641) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Shanghai Wanye Enterprises Co.,Ltd (SHSE:600641) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See our latest analysis for Shanghai Wanye EnterprisesLtd

How Much Debt Does Shanghai Wanye EnterprisesLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Shanghai Wanye EnterprisesLtd had CN¥418.3m of debt in June 2024, down from CN¥469.6m, one year before. But on the other hand it also has CN¥3.57b in cash, leading to a CN¥3.15b net cash position.

How Healthy Is Shanghai Wanye EnterprisesLtd's Balance Sheet?

According to the last reported balance sheet, Shanghai Wanye EnterprisesLtd had liabilities of CN¥695.0m due within 12 months, and liabilities of CN¥782.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.57b as well as receivables valued at CN¥100.2m due within 12 months. So it actually has CN¥2.19b 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. Due to its strong net asset position, it is not likely to face issues 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shanghai Wanye EnterprisesLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shanghai Wanye EnterprisesLtd had a loss before interest and tax, and actually shrunk its revenue by 44%, to CN¥776m. To be frank that doesn't bode well.

So How Risky Is Shanghai Wanye EnterprisesLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Shanghai Wanye EnterprisesLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥638m of cash and made a loss of CN¥38m. With only CN¥3.15b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Shanghai Wanye EnterprisesLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.