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.' 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 note that Wuhan Huazhong Numerical Control Co.,Ltd. (SZSE:300161) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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

How Much Debt Does Wuhan Huazhong Numerical ControlLtd Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Wuhan Huazhong Numerical ControlLtd had debt of CN¥1.65b, up from CN¥955.0m in one year. However, it does have CN¥619.1m in cash offsetting this, leading to net debt of about CN¥1.03b.

How Healthy Is Wuhan Huazhong Numerical ControlLtd's Balance Sheet?

We can see from the most recent balance sheet that Wuhan Huazhong Numerical ControlLtd had liabilities of CN¥1.99b falling due within a year, and liabilities of CN¥1.11b due beyond that. On the other hand, it had cash of CN¥619.1m and CN¥1.04b worth of receivables due within a year. So its liabilities total CN¥1.44b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Wuhan Huazhong Numerical ControlLtd is worth CN¥4.18b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wuhan Huazhong Numerical ControlLtd 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.

In the last year Wuhan Huazhong Numerical ControlLtd had a loss before interest and tax, and actually shrunk its revenue by 3.4%, to CN¥1.9b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Wuhan Huazhong Numerical ControlLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥196m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥652m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Wuhan Huazhong Numerical ControlLtd (including 1 which is significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.