Is Wonders Information (SZSE:300168) Using Too Much Debt?

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Wonders Information

How Much Debt Does Wonders Information Carry?

The image below, which you can click on for greater detail, shows that Wonders Information had debt of CN¥2.72b at the end of March 2024, a reduction from CN¥3.19b over a year. However, because it has a cash reserve of CN¥1.24b, its net debt is less, at about CN¥1.48b.

How Healthy Is Wonders Information's Balance Sheet?

We can see from the most recent balance sheet that Wonders Information had liabilities of CN¥3.80b falling due within a year, and liabilities of CN¥799.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.24b as well as receivables valued at CN¥1.20b due within 12 months. So its liabilities total CN¥2.16b more than the combination of its cash and short-term receivables.

Wonders Information has a market capitalization of CN¥7.98b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wonders Information'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.

In the last year Wonders Information had a loss before interest and tax, and actually shrunk its revenue by 30%, to CN¥2.1b. To be frank that doesn't bode well.

Caveat Emptor

While Wonders Information's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥980m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥363m of cash over the last year. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Wonders Information's profit, revenue, and operating cashflow have changed over the last few years.

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.