Is Wus Printed Circuit (Kunshan) (SZSE:002463) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Wus Printed Circuit (Kunshan) Co., Ltd. (SZSE:002463) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Wus Printed Circuit (Kunshan)

How Much Debt Does Wus Printed Circuit (Kunshan) Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Wus Printed Circuit (Kunshan) had CN¥2.61b of debt, an increase on CN¥1.49b, over one year. However, its balance sheet shows it holds CN¥3.21b in cash, so it actually has CN¥602.9m net cash.

How Strong Is Wus Printed Circuit (Kunshan)'s Balance Sheet?

We can see from the most recent balance sheet that Wus Printed Circuit (Kunshan) had liabilities of CN¥5.02b falling due within a year, and liabilities of CN¥1.18b due beyond that. Offsetting these obligations, it had cash of CN¥3.21b as well as receivables valued at CN¥2.79b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥204.0m.

Having regard to Wus Printed Circuit (Kunshan)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥56.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Wus Printed Circuit (Kunshan) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Wus Printed Circuit (Kunshan) grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wus Printed Circuit (Kunshan)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Wus Printed Circuit (Kunshan) 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. During the last three years, Wus Printed Circuit (Kunshan) produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Wus Printed Circuit (Kunshan)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥602.9m. And it impressed us with free cash flow of CN¥1.4b, being 74% of its EBIT. So is Wus Printed Circuit (Kunshan)'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, we've discovered 1 warning sign for Wus Printed Circuit (Kunshan) that you should be aware of before investing here.

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.