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.' 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. We can see that Wus Printed Circuit (Kunshan) Co., Ltd. (SZSE:002463) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Wus Printed Circuit (Kunshan)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Wus Printed Circuit (Kunshan) had CN¥3.41b of debt, an increase on CN¥2.40b, over one year. But on the other hand it also has CN¥3.83b in cash, leading to a CN¥415.9m net cash position.

How Healthy Is Wus Printed Circuit (Kunshan)'s Balance Sheet?

According to the last reported balance sheet, Wus Printed Circuit (Kunshan) had liabilities of CN¥6.40b due within 12 months, and liabilities of CN¥935.6m due beyond 12 months. On the other hand, it had cash of CN¥3.83b and CN¥2.51b worth of receivables due within a year. So its liabilities total CN¥996.4m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Wus Printed Circuit (Kunshan)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥61.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Wus Printed Circuit (Kunshan) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Wus Printed Circuit (Kunshan) grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. 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 Wus Printed Circuit (Kunshan) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Wus Printed Circuit (Kunshan) 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, Wus Printed Circuit (Kunshan) produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Wus Printed Circuit (Kunshan)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥415.9m. And we liked the look of last year's 31% year-on-year EBIT growth. So we don't think Wus Printed Circuit (Kunshan)'s use of debt is 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. Case in point: We've spotted 1 warning sign for Wus Printed Circuit (Kunshan) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.