Is Wingtech TechnologyLtd (SHSE:600745) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Wingtech Technology Co.,Ltd (SHSE:600745) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Wingtech TechnologyLtd

How Much Debt Does Wingtech TechnologyLtd Carry?

The chart below, which you can click on for greater detail, shows that Wingtech TechnologyLtd had CN¥16.8b in debt in June 2024; about the same as the year before. However, it also had CN¥8.21b in cash, and so its net debt is CN¥8.63b.

How Healthy Is Wingtech TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Wingtech TechnologyLtd had liabilities of CN¥24.4b due within 12 months, and liabilities of CN¥13.6b due beyond 12 months. Offsetting this, it had CN¥8.21b in cash and CN¥8.77b in receivables that were due within 12 months. So its liabilities total CN¥21.0b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥30.9b, so it does suggest shareholders should keep an eye on Wingtech TechnologyLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Wingtech TechnologyLtd's net debt to EBITDA ratio of about 2.0 suggests only moderate use of debt. And its commanding EBIT of 16.9 times its interest expense, implies the debt load is as light as a peacock feather. Shareholders should be aware that Wingtech TechnologyLtd's EBIT was down 39% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wingtech TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Wingtech TechnologyLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Wingtech TechnologyLtd's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Overall, it seems to us that Wingtech TechnologyLtd's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. 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 Wingtech TechnologyLtd is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.