Is Wha Yu Industrial (TWSE:3419) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Wha Yu Industrial Co., Ltd. (TWSE:3419) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Wha Yu Industrial

What Is Wha Yu Industrial's Debt?

As you can see below, Wha Yu Industrial had NT$365.8m of debt at June 2024, down from NT$414.1m a year prior. But it also has NT$478.8m in cash to offset that, meaning it has NT$113.0m net cash.

A Look At Wha Yu Industrial's Liabilities

Zooming in on the latest balance sheet data, we can see that Wha Yu Industrial had liabilities of NT$468.2m due within 12 months and liabilities of NT$235.5m due beyond that. On the other hand, it had cash of NT$478.8m and NT$509.0m worth of receivables due within a year. So it actually has NT$284.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Wha Yu Industrial could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Wha Yu Industrial has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wha Yu Industrial will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Wha Yu Industrial had a loss before interest and tax, and actually shrunk its revenue by 24%, to NT$1.4b. To be frank that doesn't bode well.

So How Risky Is Wha Yu Industrial?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Wha Yu Industrial had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$101m and booked a NT$168m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$113.0m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 instance, we've identified 2 warning signs for Wha Yu Industrial (1 is a bit unpleasant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.