Is Suzhou Wanxiang TechnologyLtd (SZSE:301180) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Suzhou Wanxiang Technology Co.,Ltd (SZSE:301180) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Suzhou Wanxiang TechnologyLtd

What Is Suzhou Wanxiang TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Suzhou Wanxiang TechnologyLtd had debt of CN¥32.5m, up from none in one year. But it also has CN¥104.3m in cash to offset that, meaning it has CN¥71.8m net cash.

How Strong Is Suzhou Wanxiang TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Suzhou Wanxiang TechnologyLtd had liabilities of CN¥335.7m due within a year, and liabilities of CN¥68.3m falling due after that. Offsetting these obligations, it had cash of CN¥104.3m as well as receivables valued at CN¥443.8m due within 12 months. So it actually has CN¥144.1m more liquid assets than total liabilities.

This surplus suggests that Suzhou Wanxiang TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Suzhou Wanxiang TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Suzhou Wanxiang TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Suzhou Wanxiang TechnologyLtd reported revenue of CN¥1.0b, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Suzhou Wanxiang TechnologyLtd?

While Suzhou Wanxiang TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥14m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 3 warning signs with Suzhou Wanxiang TechnologyLtd (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.