Wuxi Autowell TechnologyLtd (SHSE:688516) Has A Pretty Healthy Balance Sheet

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 can see that Wuxi Autowell Technology Co.,Ltd. (SHSE:688516) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Wuxi Autowell TechnologyLtd

What Is Wuxi Autowell TechnologyLtd's Net Debt?

As you can see below, at the end of March 2024, Wuxi Autowell TechnologyLtd had CN¥1.96b of debt, up from CN¥454.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥2.43b in cash, leading to a CN¥472.6m net cash position.

A Look At Wuxi Autowell TechnologyLtd's Liabilities

The latest balance sheet data shows that Wuxi Autowell TechnologyLtd had liabilities of CN¥10.0b due within a year, and liabilities of CN¥1.40b falling due after that. Offsetting these obligations, it had cash of CN¥2.43b as well as receivables valued at CN¥2.87b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.14b.

Wuxi Autowell TechnologyLtd has a market capitalization of CN¥16.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Wuxi Autowell TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Wuxi Autowell TechnologyLtd has boosted its EBIT by 82%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wuxi Autowell TechnologyLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wuxi Autowell TechnologyLtd 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. In the last three years, Wuxi Autowell TechnologyLtd created free cash flow amounting to 7.2% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Wuxi Autowell TechnologyLtd does have more liabilities than liquid assets, it also has net cash of CN¥472.6m. And we liked the look of last year's 82% year-on-year EBIT growth. So we are not troubled with Wuxi Autowell TechnologyLtd'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. For instance, we've identified 2 warning signs for Wuxi Autowell TechnologyLtd (1 is significant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.