Wangsu Science & TechnologyLtd (SZSE:300017) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Wangsu Science & Technology Co.,Ltd. (SZSE:300017) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Wangsu Science & TechnologyLtd had CN¥922.0m of debt, an increase on CN¥279.6m, over one year. However, its balance sheet shows it holds CN¥6.56b in cash, so it actually has CN¥5.64b net cash.

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 surplus suggests that Wangsu Science & TechnologyLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Wangsu Science & TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wangsu Science & TechnologyLtd can strengthen its balance sheet over time. 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. Wangsu Science & 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. Over the last three years, Wangsu Science & TechnologyLtd actually produced more free cash flow than EBIT. 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 Wangsu Science & TechnologyLtd has net cash of CN¥5.64b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥671m, being 316% of its EBIT. 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. For example, we've discovered 1 warning sign for Wangsu Science & TechnologyLtd that you should be aware of before investing here.

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.