These 4 Measures Indicate That Wuhan Raycus Fiber Laser TechnologiesLtd (SZSE:300747) Is Using Debt Reasonably Well

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.' 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 note that Wuhan Raycus Fiber Laser Technologies Co.,Ltd. (SZSE:300747) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, 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 thing to do when considering how much debt a business uses is to look at 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?

The image below, which you can click on for greater detail, shows that at March 2024 Wuhan Raycus Fiber Laser TechnologiesLtd had debt of CN¥425.0m, up from CN¥350.0m in one year. However, it does have CN¥713.9m in cash offsetting this, leading to net cash of CN¥288.9m.

How Healthy Is Wuhan Raycus Fiber Laser TechnologiesLtd's Balance Sheet?

We can see from the most recent balance sheet that Wuhan Raycus Fiber Laser TechnologiesLtd had liabilities of CN¥2.26b falling due within a year, and liabilities of CN¥206.2m due beyond that. Offsetting these obligations, it had cash of CN¥713.9m as well as receivables valued at CN¥2.21b due within 12 months. So it can boast CN¥454.6m 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. Succinctly put, Wuhan Raycus Fiber Laser TechnologiesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Wuhan Raycus Fiber Laser TechnologiesLtd grew its EBIT by 5,207% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Wuhan Raycus Fiber Laser TechnologiesLtd can strengthen its balance sheet over time. 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. 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. Over the last three years, Wuhan Raycus Fiber Laser TechnologiesLtd 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 Wuhan Raycus Fiber Laser TechnologiesLtd has CN¥288.9m in net cash and a decent-looking balance sheet. And we liked the look of last year's 5,207% year-on-year EBIT growth. So we are not troubled with Wuhan Raycus Fiber Laser TechnologiesLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Wuhan Raycus Fiber Laser TechnologiesLtd has 1 warning sign we think you should be aware of.

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.

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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.