These 4 Measures Indicate That Wutong Holding Group (SZSE:300292) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Wutong Holding Group Co., Ltd. (SZSE:300292) does use debt in its business. But is this debt a concern to shareholders?

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Wutong Holding Group Carry?

The image below, which you can click on for greater detail, shows that Wutong Holding Group had debt of CN¥413.0m at the end of September 2024, a reduction from CN¥447.3m over a year. However, it does have CN¥421.9m in cash offsetting this, leading to net cash of CN¥8.91m.

A Look At Wutong Holding Group's Liabilities

The latest balance sheet data shows that Wutong Holding Group had liabilities of CN¥1.23b due within a year, and liabilities of CN¥4.14m falling due after that. On the other hand, it had cash of CN¥421.9m and CN¥1.60b worth of receivables due within a year. So it actually has CN¥782.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Wutong Holding Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Wutong Holding Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Wutong Holding Group

On top of that, Wutong Holding Group grew its EBIT by 62% 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 Wutong Holding Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Wutong Holding Group 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. Over the last three years, Wutong Holding Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wutong Holding Group has net cash of CN¥8.91m, as well as more liquid assets than liabilities. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in CN¥58m. So we don't think Wutong Holding Group's use of debt 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wutong Holding Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.