We Think Ways ElectronLtd (SHSE:605218) Can Stay On Top Of Its 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 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 Ways Electron Co.,Ltd. (SHSE:605218) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ways ElectronLtd

How Much Debt Does Ways ElectronLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Ways ElectronLtd had CN¥12.4m of debt, an increase on CN¥10.5m, over one year. But it also has CN¥528.8m in cash to offset that, meaning it has CN¥516.4m net cash.

How Healthy Is Ways ElectronLtd's Balance Sheet?

According to the last reported balance sheet, Ways ElectronLtd had liabilities of CN¥468.1m due within 12 months, and liabilities of CN¥34.1m due beyond 12 months. On the other hand, it had cash of CN¥528.8m and CN¥489.6m worth of receivables due within a year. So it actually has CN¥516.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Ways ElectronLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ways ElectronLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Ways ElectronLtd grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ways ElectronLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ways ElectronLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Ways ElectronLtd 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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ways ElectronLtd has net cash of CN¥516.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 50% over the last year. So we don't have any problem with Ways ElectronLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Ways ElectronLtd (2 are a bit unpleasant) you should be aware of.

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.