Does WG TECH (Jiang Xi) (SHSE:603773) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies WG TECH (Jiang Xi) Co., Ltd. (SHSE:603773) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for WG TECH (Jiang Xi)

What Is WG TECH (Jiang Xi)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 WG TECH (Jiang Xi) had CN¥1.26b of debt, an increase on CN¥698.3m, over one year. On the flip side, it has CN¥615.0m in cash leading to net debt of about CN¥645.2m.

How Strong Is WG TECH (Jiang Xi)'s Balance Sheet?

According to the last reported balance sheet, WG TECH (Jiang Xi) had liabilities of CN¥1.69b due within 12 months, and liabilities of CN¥579.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥615.0m as well as receivables valued at CN¥991.3m due within 12 months. So it has liabilities totalling CN¥664.8m more than its cash and near-term receivables, combined.

Given WG TECH (Jiang Xi) has a market capitalization of CN¥4.37b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 WG TECH (Jiang Xi) 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.

In the last year WG TECH (Jiang Xi) wasn't profitable at an EBIT level, but managed to grow its revenue by 9.5%, to CN¥1.6b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, WG TECH (Jiang Xi) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥21m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥222m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for WG TECH (Jiang Xi) that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.