Wuhan Dameng Database (SHSE:688692) Seems To Use Debt Rather Sparingly

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.' 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. We can see that Wuhan Dameng Database Company Limited (SHSE:688692) does use debt in its business. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. 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.

What Is Wuhan Dameng Database's Debt?

As you can see below, at the end of September 2024, Wuhan Dameng Database had CN¥19.7m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥2.70b in cash to offset that, meaning it has CN¥2.68b net cash.

How Healthy Is Wuhan Dameng Database's Balance Sheet?

The latest balance sheet data shows that Wuhan Dameng Database had liabilities of CN¥358.4m due within a year, and liabilities of CN¥84.8m falling due after that. On the other hand, it had cash of CN¥2.70b and CN¥501.6m worth of receivables due within a year. So it can boast CN¥2.76b more liquid assets than total liabilities.

This surplus suggests that Wuhan Dameng Database has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Wuhan Dameng Database boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Wuhan Dameng Database

In addition to that, we're happy to report that Wuhan Dameng Database has boosted its EBIT by 31%, 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 Wuhan Dameng Database'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, a company can only pay off debt with cold hard cash, not accounting profits. Wuhan Dameng Database 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. During the last three years, Wuhan Dameng Database produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wuhan Dameng Database has CN¥2.68b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 31% over the last year. So we don't think Wuhan Dameng Database's use of debt is risky. 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. Be aware that Wuhan Dameng Database is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.