Does Wuhan Guide Infrared (SZSE:002414) Have A Healthy Balance Sheet?

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.' 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 can see that Wuhan Guide Infrared Co., Ltd. (SZSE:002414) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Wuhan Guide Infrared

What Is Wuhan Guide Infrared's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Wuhan Guide Infrared had debt of CN¥1.00b, up from CN¥704.3m in one year. However, it does have CN¥1.27b in cash offsetting this, leading to net cash of CN¥271.5m.

A Look At Wuhan Guide Infrared's Liabilities

According to the last reported balance sheet, Wuhan Guide Infrared had liabilities of CN¥2.30b due within 12 months, and liabilities of CN¥400.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.27b as well as receivables valued at CN¥1.73b due within 12 months. So it can boast CN¥304.8m more liquid assets than total liabilities.

This state of affairs indicates that Wuhan Guide Infrared's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥32.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Wuhan Guide Infrared boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wuhan Guide Infrared'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.

Over 12 months, Wuhan Guide Infrared reported revenue of CN¥2.6b, which is a gain of 8.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Wuhan Guide Infrared?

While Wuhan Guide Infrared lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥14m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Wuhan Guide Infrared's profit, revenue, and operating cashflow have changed over the last few years.

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.