WuXi Xinje ElectricLtd (SHSE:603416) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, WuXi Xinje Electric Co.,Ltd. (SHSE:603416) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for WuXi Xinje ElectricLtd

How Much Debt Does WuXi Xinje ElectricLtd Carry?

As you can see below, at the end of September 2023, WuXi Xinje ElectricLtd had CN¥111.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.26b in cash, so it actually has CN¥1.15b net cash.

How Strong Is WuXi Xinje ElectricLtd's Balance Sheet?

According to the last reported balance sheet, WuXi Xinje ElectricLtd had liabilities of CN¥894.8m due within 12 months, and liabilities of CN¥33.2m due beyond 12 months. Offsetting this, it had CN¥1.26b in cash and CN¥386.7m in receivables that were due within 12 months. So it actually has CN¥720.8m more liquid assets than total liabilities.

This excess liquidity suggests that WuXi Xinje ElectricLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, WuXi Xinje ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that WuXi Xinje ElectricLtd has increased its EBIT by 9.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WuXi Xinje ElectricLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. WuXi Xinje ElectricLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, WuXi Xinje ElectricLtd's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case WuXi Xinje ElectricLtd has CN¥1.15b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 9.3% in the last twelve months. So is WuXi Xinje ElectricLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in WuXi Xinje ElectricLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.