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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Wangsu Science & Technology Co.,Ltd. (SZSE:300017) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Wangsu Science & TechnologyLtd

What Is Wangsu Science & TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Wangsu Science & TechnologyLtd had debt of CN¥922.0m, up from CN¥279.6m in one year. However, it does have CN¥6.56b in cash offsetting this, leading to net cash of CN¥5.64b.

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

Zooming in on the latest balance sheet data, we can see that Wangsu Science & TechnologyLtd had liabilities of CN¥2.14b due within 12 months and liabilities of CN¥55.8m due beyond that. On the other hand, it had cash of CN¥6.56b and CN¥1.14b worth of receivables due within a year. So it can boast CN¥5.51b more liquid assets than total liabilities.

This excess liquidity suggests that Wangsu Science & TechnologyLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble 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!

In addition to that, we're happy to report that Wangsu Science & TechnologyLtd has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. 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 Wangsu Science & 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, 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 three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wangsu Science & TechnologyLtd has CN¥5.64b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 316% of that EBIT to free cash flow, bringing in CN¥671m. The bottom line is that we do not find Wangsu Science & TechnologyLtd's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Wangsu Science & TechnologyLtd is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.