Is Wuhan Jingce Electronic GroupLtd (SZSE:300567) Using Too Much Debt?

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.' 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 can see that Wuhan Jingce Electronic Group Co.,Ltd (SZSE:300567) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wuhan Jingce Electronic GroupLtd

What Is Wuhan Jingce Electronic GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Wuhan Jingce Electronic GroupLtd had debt of CN¥3.48b, up from CN¥3.13b in one year. However, because it has a cash reserve of CN¥1.38b, its net debt is less, at about CN¥2.10b.

A Look At Wuhan Jingce Electronic GroupLtd's Liabilities

We can see from the most recent balance sheet that Wuhan Jingce Electronic GroupLtd had liabilities of CN¥3.04b falling due within a year, and liabilities of CN¥2.39b due beyond that. Offsetting these obligations, it had cash of CN¥1.38b as well as receivables valued at CN¥1.85b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.20b.

Given Wuhan Jingce Electronic GroupLtd has a market capitalization of CN¥13.0b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wuhan Jingce Electronic GroupLtd'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.

In the last year Wuhan Jingce Electronic GroupLtd had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥2.4b. That's not what we would hope to see.

Caveat Emptor

Not only did Wuhan Jingce Electronic GroupLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥49m 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. Another cause for caution is that is bled CN¥150m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. Be aware that Wuhan Jingce Electronic GroupLtd is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.