These 4 Measures Indicate That Willfar Information Technology (SHSE:688100) Is Using Debt Safely

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 Willfar Information Technology Co., Ltd. (SHSE:688100) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 Willfar Information Technology

What Is Willfar Information Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Willfar Information Technology had debt of CN¥11.0m at the end of December 2023, a reduction from CN¥23.5m over a year. But it also has CN¥1.75b in cash to offset that, meaning it has CN¥1.74b net cash.

How Healthy Is Willfar Information Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Willfar Information Technology had liabilities of CN¥1.26b due within 12 months and liabilities of CN¥20.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.75b as well as receivables valued at CN¥1.54b due within 12 months. So it actually has CN¥2.01b more liquid assets than total liabilities.

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

Also positive, Willfar Information Technology grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Willfar Information Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Willfar Information Technology 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. Over the most recent three years, Willfar Information Technology recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Willfar Information Technology has net cash of CN¥1.74b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 29% over the last year. So is Willfar Information Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Willfar Information Technology has 1 warning sign we think you should be aware of.

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.