Wutong Holding Group (SZSE:300292) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Wutong Holding Group Co., Ltd. (SZSE:300292) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wutong Holding Group

How Much Debt Does Wutong Holding Group Carry?

You can click the graphic below for the historical numbers, but it shows that Wutong Holding Group had CN¥413.0m of debt in September 2024, down from CN¥447.3m, one year before. But it also has CN¥421.9m in cash to offset that, meaning it has CN¥8.91m net cash.

How Strong Is Wutong Holding Group's Balance Sheet?

We can see from the most recent balance sheet that Wutong Holding Group had liabilities of CN¥1.23b falling due within a year, and liabilities of CN¥4.14m due beyond 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 can boast 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. Simply put, the fact that Wutong Holding Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Wutong Holding Group has boosted its EBIT by 62%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Wutong Holding Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Wutong Holding Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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. And it impressed us with free cash flow of CN¥58m, being 125% of its EBIT. So is Wutong Holding Group's debt a risk? It doesn't seem so to us. 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 be aware of the 3 warning signs we've spotted with Wutong Holding Group .

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.