Is Wenfeng Great World Chain Development (SHSE:601010) A Risky Investment?

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.' 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 can see that Wenfeng Great World Chain Development Corporation (SHSE:601010) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Wenfeng Great World Chain Development

How Much Debt Does Wenfeng Great World Chain Development Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Wenfeng Great World Chain Development had debt of CN¥23.1m, up from none in one year. However, it does have CN¥850.2m in cash offsetting this, leading to net cash of CN¥827.1m.

How Strong Is Wenfeng Great World Chain Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wenfeng Great World Chain Development had liabilities of CN¥1.78b due within 12 months and liabilities of CN¥147.8m due beyond that. Offsetting these obligations, it had cash of CN¥850.2m as well as receivables valued at CN¥68.4m due within 12 months. So it has liabilities totalling CN¥1.01b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Wenfeng Great World Chain Development has a market capitalization of CN¥5.00b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Wenfeng Great World Chain Development also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Wenfeng Great World Chain Development's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wenfeng Great World Chain Development's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Wenfeng Great World Chain Development 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, Wenfeng Great World Chain Development actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Wenfeng Great World Chain Development's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥827.1m. And it impressed us with free cash flow of CN¥144m, being 121% of its EBIT. So we don't have any problem with Wenfeng Great World Chain Development's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Wenfeng Great World Chain Development that you should be aware of.

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.