Is Wanma Technology (SZSE:300698) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Wanma Technology Co., Ltd. (SZSE:300698) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wanma Technology

What Is Wanma Technology's Net Debt?

As you can see below, at the end of March 2024, Wanma Technology had CN¥66.5m of debt, up from CN¥47.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥74.3m in cash, so it actually has CN¥7.75m net cash.

How Healthy Is Wanma Technology's Balance Sheet?

According to the last reported balance sheet, Wanma Technology had liabilities of CN¥330.8m due within 12 months, and liabilities of CN¥15.6m due beyond 12 months. On the other hand, it had cash of CN¥74.3m and CN¥294.0m worth of receivables due within a year. So it can boast CN¥21.9m more liquid assets than total liabilities.

This state of affairs indicates that Wanma Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.77b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Wanma Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Wanma Technology grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Wanma Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Wanma Technology 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, Wanma Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wanma Technology has CN¥7.75m in net cash and a decent-looking balance sheet. And we liked the look of last year's 26% year-on-year EBIT growth. So we don't have any problem with Wanma Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Wanma Technology has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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