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, Shanghai Wanye Enterprises Co.,Ltd (SHSE:600641) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shanghai Wanye EnterprisesLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Wanye EnterprisesLtd had CN¥418.3m of debt in June 2024, down from CN¥469.6m, one year before. However, it does have CN¥3.57b in cash offsetting this, leading to net cash of CN¥3.15b.

A Look At Shanghai Wanye EnterprisesLtd's Liabilities

According to the last reported balance sheet, Shanghai Wanye EnterprisesLtd had liabilities of CN¥695.0m due within 12 months, and liabilities of CN¥782.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.57b as well as receivables valued at CN¥100.2m due within 12 months. So it can boast CN¥2.19b more liquid assets than total liabilities.

This surplus suggests that Shanghai Wanye EnterprisesLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Shanghai Wanye EnterprisesLtd 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 ultimately the future profitability of the business will decide if Shanghai Wanye EnterprisesLtd 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 Shanghai Wanye EnterprisesLtd had a loss before interest and tax, and actually shrunk its revenue by 44%, to CN¥776m. To be frank that doesn't bode well.

So How Risky Is Shanghai Wanye EnterprisesLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Shanghai Wanye EnterprisesLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥638m and booked a CN¥38m accounting loss. Given it only has net cash of CN¥3.15b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Shanghai Wanye EnterprisesLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.