Does Wuhan Raycus Fiber Laser TechnologiesLtd (SZSE:300747) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Wuhan Raycus Fiber Laser Technologies Co.,Ltd. (SZSE:300747) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Wuhan Raycus Fiber Laser TechnologiesLtd

How Much Debt Does Wuhan Raycus Fiber Laser TechnologiesLtd Carry?

As you can see below, at the end of June 2024, Wuhan Raycus Fiber Laser TechnologiesLtd had CN¥425.0m of debt, up from CN¥390.0m a year ago. Click the image for more detail. But it also has CN¥978.3m in cash to offset that, meaning it has CN¥553.3m net cash.

A Look At Wuhan Raycus Fiber Laser TechnologiesLtd's Liabilities

The latest balance sheet data shows that Wuhan Raycus Fiber Laser TechnologiesLtd had liabilities of CN¥2.16b due within a year, and liabilities of CN¥207.5m falling due after that. On the other hand, it had cash of CN¥978.3m and CN¥1.90b worth of receivables due within a year. So it actually has CN¥509.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Wuhan Raycus Fiber Laser TechnologiesLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Wuhan Raycus Fiber Laser TechnologiesLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Wuhan Raycus Fiber Laser TechnologiesLtd grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. 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 Wuhan Raycus Fiber Laser TechnologiesLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Wuhan Raycus Fiber Laser TechnologiesLtd 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. During the last three years, Wuhan Raycus Fiber Laser TechnologiesLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wuhan Raycus Fiber Laser TechnologiesLtd has net cash of CN¥553.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 42% year-on-year EBIT growth. So we are not troubled with Wuhan Raycus Fiber Laser TechnologiesLtd's debt use. 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. For example, we've discovered 3 warning signs for Wuhan Raycus Fiber Laser TechnologiesLtd that you should be aware of before investing here.

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.