Health Check: How Prudently Does Wuxi Online Offline Communication Information Technology (SZSE:300959) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Wuxi Online Offline Communication Information Technology Co., Ltd. (SZSE:300959) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wuxi Online Offline Communication Information Technology

What Is Wuxi Online Offline Communication Information Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Wuxi Online Offline Communication Information Technology had debt of CN¥52.9m, up from CN¥32.9m in one year. However, its balance sheet shows it holds CN¥432.6m in cash, so it actually has CN¥379.7m net cash.

How Healthy Is Wuxi Online Offline Communication Information Technology's Balance Sheet?

We can see from the most recent balance sheet that Wuxi Online Offline Communication Information Technology had liabilities of CN¥243.1m falling due within a year, and liabilities of CN¥365.0k due beyond that. Offsetting this, it had CN¥432.6m in cash and CN¥379.0m in receivables that were due within 12 months. So it actually has CN¥568.2m more liquid assets than total liabilities.

This surplus suggests that Wuxi Online Offline Communication Information Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Wuxi Online Offline Communication Information Technology has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wuxi Online Offline Communication Information Technology'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, Wuxi Online Offline Communication Information Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 32%. To be frank that doesn't bode well.

So How Risky Is Wuxi Online Offline Communication Information Technology?

While Wuxi Online Offline Communication Information Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥9.9m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Wuxi Online Offline Communication Information Technology is showing 4 warning signs in our investment analysis , and 2 of those are significant...

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.