Here's Why Wonders Information (SZSE:300168) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Wonders Information Co., Ltd (SZSE:300168) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Wonders Information

How Much Debt Does Wonders Information Carry?

The chart below, which you can click on for greater detail, shows that Wonders Information had CN¥2.97b in debt in September 2024; about the same as the year before. However, because it has a cash reserve of CN¥1.15b, its net debt is less, at about CN¥1.82b.

How Healthy Is Wonders Information's Balance Sheet?

We can see from the most recent balance sheet that Wonders Information had liabilities of CN¥3.87b falling due within a year, and liabilities of CN¥1.05b due beyond that. On the other hand, it had cash of CN¥1.15b and CN¥1.56b worth of receivables due within a year. So it has liabilities totalling CN¥2.20b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Wonders Information has a market capitalization of CN¥10.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Wonders Information can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Wonders Information made a loss at the EBIT level, and saw its revenue drop to CN¥1.9b, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Wonders Information's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥972m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥172m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Wonders Information is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.