Does Wuhan Huazhong Numerical ControlLtd (SZSE:300161) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Wuhan Huazhong Numerical Control Co.,Ltd. (SZSE:300161) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wuhan Huazhong Numerical ControlLtd

What Is Wuhan Huazhong Numerical ControlLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Wuhan Huazhong Numerical ControlLtd had CN¥1.09b of debt, an increase on CN¥706.0m, over one year. However, it also had CN¥700.5m in cash, and so its net debt is CN¥385.3m.

A Look At Wuhan Huazhong Numerical ControlLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Wuhan Huazhong Numerical ControlLtd had liabilities of CN¥1.80b due within 12 months and liabilities of CN¥739.8m due beyond that. On the other hand, it had cash of CN¥700.5m and CN¥1.26b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥585.1m.

Given Wuhan Huazhong Numerical ControlLtd has a market capitalization of CN¥5.48b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Wuhan Huazhong Numerical ControlLtd'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 Huazhong Numerical ControlLtd reported revenue of CN¥2.1b, which is a gain of 27%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Wuhan Huazhong Numerical ControlLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥65m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥245m of cash over the last year. So to be blunt we think it is risky. 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 - Wuhan Huazhong Numerical ControlLtd has 2 warning signs 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.