We Think Wiscom System (SZSE:002090) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Wiscom System Co., Ltd. (SZSE:002090) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Wiscom System

What Is Wiscom System's Debt?

As you can see below, at the end of September 2024, Wiscom System had CN¥181.8m of debt, up from CN¥119.2m a year ago. Click the image for more detail. But it also has CN¥509.6m in cash to offset that, meaning it has CN¥327.8m net cash.

How Strong Is Wiscom System's Balance Sheet?

According to the last reported balance sheet, Wiscom System had liabilities of CN¥1.46b due within 12 months, and liabilities of CN¥34.2m due beyond 12 months. On the other hand, it had cash of CN¥509.6m and CN¥1.03b worth of receivables due within a year. So it can boast CN¥52.2m more liquid assets than total liabilities.

Having regard to Wiscom System's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.27b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Wiscom System has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Wiscom System grew its EBIT by 307% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wiscom System'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Wiscom System 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. Happily for any shareholders, Wiscom System actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wiscom System has net cash of CN¥327.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥215m, being 684% of its EBIT. So is Wiscom System's debt a risk? It doesn't seem so to us. 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 example - Wiscom System has 1 warning sign we think 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.