Is World Precision Machinery (SGX:B49) Using Too Much Debt?

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.' 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, World Precision Machinery Limited (SGX:B49) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for World Precision Machinery

What Is World Precision Machinery's Debt?

As you can see below, World Precision Machinery had CN¥240.0m of debt at September 2024, down from CN¥250.0m a year prior. But on the other hand it also has CN¥425.0m in cash, leading to a CN¥185.0m net cash position.

A Look At World Precision Machinery's Liabilities

The latest balance sheet data shows that World Precision Machinery had liabilities of CN¥1.18b due within a year, and liabilities of CN¥48.2m falling due after that. Offsetting this, it had CN¥425.0m in cash and CN¥405.0m in receivables that were due within 12 months. So its liabilities total CN¥395.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥517.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, World Precision Machinery boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is World Precision Machinery'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, World Precision Machinery made a loss at the EBIT level, and saw its revenue drop to CN¥880m, which is a fall of 17%. That's not what we would hope to see.

So How Risky Is World Precision Machinery?

While World Precision Machinery lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥167m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for World Precision Machinery (3 can't be ignored!) that you should be aware of before investing here.

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.