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

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 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. As with many other companies WuHan Yangtze Communication Industry GroupCo.,Ltd (SHSE:600345) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that at March 2024 WuHan Yangtze Communication Industry GroupCo.Ltd had debt of CN¥103.8m, up from CN¥39.0m in one year. However, it does have CN¥829.2m in cash offsetting this, leading to net cash of CN¥725.4m.

How Strong Is WuHan Yangtze Communication Industry GroupCo.Ltd's Balance Sheet?

According to the last reported balance sheet, WuHan Yangtze Communication Industry GroupCo.Ltd had liabilities of CN¥921.9m due within 12 months, and liabilities of CN¥90.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥829.2m as well as receivables valued at CN¥585.3m due within 12 months. So it can boast CN¥401.7m more liquid assets than total liabilities.

This short term liquidity is a sign that WuHan Yangtze Communication Industry GroupCo.Ltd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that WuHan Yangtze Communication Industry GroupCo.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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¥713m, which is a gain of 10%, 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¥196m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 2 warning signs for WuHan Yangtze Communication Industry GroupCo.Ltd you should be aware of, and 1 of them is a bit concerning.

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.