We Think Wangsu Science & TechnologyLtd (SZSE:300017) Can Manage Its Debt With Ease

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Wangsu Science & Technology Co.,Ltd. (SZSE:300017) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wangsu Science & TechnologyLtd

How Much Debt Does Wangsu Science & TechnologyLtd Carry?

As you can see below, at the end of June 2024, Wangsu Science & TechnologyLtd had CN¥560.3m of debt, up from CN¥144.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥5.16b in cash, leading to a CN¥4.60b net cash position.

A Look At Wangsu Science & TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Wangsu Science & TechnologyLtd had liabilities of CN¥1.59b falling due within a year, and liabilities of CN¥67.6m due beyond that. On the other hand, it had cash of CN¥5.16b and CN¥1.26b worth of receivables due within a year. So it actually has CN¥4.76b 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. Given it has easily adequate short term liquidity, we don't think it will have any 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.

On top of that, Wangsu Science & TechnologyLtd grew its EBIT by 65% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. 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 it is always sensible to investigate a company's debt, in this case Wangsu Science & TechnologyLtd has CN¥4.60b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥483m, being 255% of its EBIT. The bottom line is that we do not find Wangsu Science & TechnologyLtd's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Wangsu Science & TechnologyLtd that you should be aware of before investing here.

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.