Is WuHan Yangtze Communication Industry GroupCo.Ltd (SHSE:600345) Using Too Much Debt?

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 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 can see that WuHan Yangtze Communication Industry GroupCo.,Ltd (SHSE:600345) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for WuHan Yangtze Communication Industry GroupCo.Ltd

What Is WuHan Yangtze Communication Industry GroupCo.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 WuHan Yangtze Communication Industry GroupCo.Ltd had CN¥93.1m of debt, an increase on CN¥50.8m, over one year. But it also has CN¥792.5m in cash to offset that, meaning it has CN¥699.4m net cash.

A Look At WuHan Yangtze Communication Industry GroupCo.Ltd's Liabilities

According to the last reported balance sheet, WuHan Yangtze Communication Industry GroupCo.Ltd had liabilities of CN¥932.7m due within 12 months, and liabilities of CN¥107.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥792.5m as well as receivables valued at CN¥681.6m due within 12 months. So it can boast CN¥434.3m more liquid assets than total liabilities.

This surplus suggests that WuHan Yangtze Communication Industry GroupCo.Ltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, WuHan Yangtze Communication Industry GroupCo.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is WuHan Yangtze Communication Industry GroupCo.Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, WuHan Yangtze Communication Industry GroupCo.Ltd reported revenue of CN¥811m, which is a gain of 3.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is WuHan Yangtze Communication Industry GroupCo.Ltd?

While WuHan Yangtze Communication Industry GroupCo.Ltd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥192m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. For riskier companies like WuHan Yangtze Communication Industry GroupCo.Ltd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.