Here's Why Wuxi Taiji Industry Limited (SHSE:600667) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Wuxi Taiji Industry Limited Corporation (SHSE:600667) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Wuxi Taiji Industry Limited

How Much Debt Does Wuxi Taiji Industry Limited Carry?

You can click the graphic below for the historical numbers, but it shows that Wuxi Taiji Industry Limited had CN¥4.85b of debt in March 2024, down from CN¥5.99b, one year before. However, it does have CN¥6.54b in cash offsetting this, leading to net cash of CN¥1.69b.

A Look At Wuxi Taiji Industry Limited's Liabilities

The latest balance sheet data shows that Wuxi Taiji Industry Limited had liabilities of CN¥20.4b due within a year, and liabilities of CN¥1.99b falling due after that. Offsetting this, it had CN¥6.54b in cash and CN¥13.1b in receivables that were due within 12 months. So its liabilities total CN¥2.75b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Wuxi Taiji Industry Limited has a market capitalization of CN¥12.5b, 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, Wuxi Taiji Industry Limited also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Wuxi Taiji Industry Limited turned things around in the last 12 months, delivering and EBIT of CN¥974m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wuxi Taiji Industry Limited'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wuxi Taiji Industry Limited 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. Over the last year, Wuxi Taiji Industry Limited actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Wuxi Taiji Industry Limited'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¥1.69b. The cherry on top was that in converted 261% of that EBIT to free cash flow, bringing in CN¥2.5b. So is Wuxi Taiji Industry Limited's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Wuxi Taiji Industry Limited you should know about.

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.