Wuxi Autowell TechnologyLtd (SHSE:688516) Seems To Use Debt Quite Sensibly

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 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. Importantly, Wuxi Autowell Technology Co.,Ltd. (SHSE:688516) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out our latest analysis for Wuxi Autowell TechnologyLtd

How Much Debt Does Wuxi Autowell TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Wuxi Autowell TechnologyLtd had CN¥2.06b of debt, an increase on CN¥450.8m, over one year. However, it does have CN¥2.21b in cash offsetting this, leading to net cash of CN¥145.6m.

A Look At Wuxi Autowell TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Wuxi Autowell TechnologyLtd had liabilities of CN¥9.31b due within 12 months and liabilities of CN¥1.47b due beyond that. On the other hand, it had cash of CN¥2.21b and CN¥2.84b worth of receivables due within a year. So its liabilities total CN¥5.74b more than the combination of its cash and short-term receivables.

Wuxi Autowell TechnologyLtd has a market capitalization of CN¥11.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Wuxi Autowell TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Wuxi Autowell TechnologyLtd grew its EBIT by 80% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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'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 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 9.4% 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¥145.6m. And we liked the look of last year's 80% year-on-year EBIT growth. So we are not troubled with Wuxi Autowell TechnologyLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Wuxi Autowell TechnologyLtd (1 shouldn't be ignored) you should be aware of.

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.