Does Wuhan Guide Infrared (SZSE:002414) Have A Healthy Balance Sheet?

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.' 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 note that Wuhan Guide Infrared Co., Ltd. (SZSE:002414) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Wuhan Guide Infrared

What Is Wuhan Guide Infrared's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Wuhan Guide Infrared had debt of CN¥750.5m, up from CN¥362.6m in one year. But it also has CN¥1.18b in cash to offset that, meaning it has CN¥426.3m net cash.

A Look At Wuhan Guide Infrared's Liabilities

Zooming in on the latest balance sheet data, we can see that Wuhan Guide Infrared had liabilities of CN¥1.61b due within 12 months and liabilities of CN¥377.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.18b as well as receivables valued at CN¥1.73b due within 12 months. So it can boast CN¥920.5m more liquid assets than total liabilities.

This surplus suggests that Wuhan Guide Infrared has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Wuhan Guide Infrared boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Wuhan Guide Infrared's saving grace is its low debt levels, because its EBIT has tanked 99% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wuhan Guide Infrared's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wuhan Guide Infrared may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Wuhan Guide Infrared burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wuhan Guide Infrared has CN¥426.3m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Wuhan Guide Infrared's balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wuhan Guide Infrared you should know about.

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.