We Think Wuhan Huazhong Numerical ControlLtd (SZSE:300161) Has A Fair Chunk Of Debt

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.' 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 can see that Wuhan Huazhong Numerical Control Co.,Ltd. (SZSE:300161) does use debt in its business. But is this debt a concern to shareholders?

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. 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, 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.

View our latest analysis for Wuhan Huazhong Numerical ControlLtd

What Is Wuhan Huazhong Numerical ControlLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Wuhan Huazhong Numerical ControlLtd had debt of CN¥1.67b, up from CN¥1.06b in one year. On the flip side, it has CN¥436.9m in cash leading to net debt of about CN¥1.23b.

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¥2.06b due within 12 months and liabilities of CN¥1.10b due beyond that. On the other hand, it had cash of CN¥436.9m and CN¥1.04b worth of receivables due within a year. So it has liabilities totalling CN¥1.69b more than its cash and near-term receivables, combined.

Wuhan Huazhong Numerical ControlLtd has a market capitalization of CN¥5.23b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wuhan Huazhong Numerical ControlLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Wuhan Huazhong Numerical ControlLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.9b, which is a fall of 3.1%. We would much prefer see growth.

Caveat Emptor

Importantly, Wuhan Huazhong Numerical ControlLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥106m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥737m 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wuhan Huazhong Numerical ControlLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.