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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Wus Printed Circuit (Kunshan) Co., Ltd. (SZSE:002463) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wus Printed Circuit (Kunshan)

What Is Wus Printed Circuit (Kunshan)'s Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Wus Printed Circuit (Kunshan) had debt of CN¥3.44b, up from CN¥2.52b in one year. However, it does have CN¥2.53b in cash offsetting this, leading to net debt of about CN¥916.6m.

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

Zooming in on the latest balance sheet data, we can see that Wus Printed Circuit (Kunshan) had liabilities of CN¥7.19b due within 12 months and liabilities of CN¥923.1m due beyond that. Offsetting these obligations, it had cash of CN¥2.53b as well as receivables valued at CN¥3.04b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.55b.

Given Wus Printed Circuit (Kunshan) has a humongous market capitalization of CN¥77.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Wus Printed Circuit (Kunshan) has virtually no net debt, so it's fair to say it does not have a heavy debt load!

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Wus Printed Circuit (Kunshan) has net debt of just 0.30 times EBITDA, suggesting it could ramp leverage without breaking a sweat. And remarkably, despite having net debt, it actually received more in interest over the last twelve months than it had to pay. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. On top of that, Wus Printed Circuit (Kunshan) grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Wus Printed Circuit (Kunshan) produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

The good news is that Wus Printed Circuit (Kunshan)'s demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its EBIT growth rate also supports that impression! Zooming out, Wus Printed Circuit (Kunshan) seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Wus Printed Circuit (Kunshan) 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.