Is Wangsu Science & TechnologyLtd (SZSE:300017) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Wangsu Science & Technology Co.,Ltd. (SZSE:300017) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wangsu Science & TechnologyLtd

What Is Wangsu Science & TechnologyLtd's Net Debt?

As you can see below, Wangsu Science & TechnologyLtd had CN¥80.1m of debt at March 2024, down from CN¥144.5m a year prior. However, its balance sheet shows it holds CN¥5.29b in cash, so it actually has CN¥5.21b net cash.

How Strong Is Wangsu Science & TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Wangsu Science & TechnologyLtd had liabilities of CN¥1.16b due within 12 months, and liabilities of CN¥72.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.29b as well as receivables valued at CN¥1.16b due within 12 months. So it actually has CN¥5.22b more liquid assets than total liabilities.

It's good to see that Wangsu Science & TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Wangsu Science & TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Wangsu Science & TechnologyLtd grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wangsu Science & 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Wangsu Science & TechnologyLtd 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, Wangsu Science & TechnologyLtd actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wangsu Science & TechnologyLtd has net cash of CN¥5.21b, as well as more liquid assets than liabilities. The cherry on top was that in converted 314% of that EBIT to free cash flow, bringing in CN¥878m. The bottom line is that we do not find Wangsu Science & TechnologyLtd's debt levels at all concerning. 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 Wangsu Science & TechnologyLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.