David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Wangfujing Group Co., Ltd. (SHSE:600859) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Wangfujing Group's Debt?

The chart below, which you can click on for greater detail, shows that Wangfujing Group had CN¥1.89b in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds CN¥9.63b in cash, so it actually has CN¥7.74b net cash.

How Healthy Is Wangfujing Group's Balance Sheet?

We can see from the most recent balance sheet that Wangfujing Group had liabilities of CN¥7.85b falling due within a year, and liabilities of CN¥12.3b due beyond that. Offsetting this, it had CN¥9.63b in cash and CN¥527.3m in receivables that were due within 12 months. So its liabilities total CN¥10.0b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Wangfujing Group is worth CN¥18.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Wangfujing Group boasts net cash, so it's fair to say it does not have a heavy debt load!

While Wangfujing Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wangfujing Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Wangfujing Group 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. Over the last three years, Wangfujing Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Wangfujing Group does have more liabilities than liquid assets, it also has net cash of CN¥7.74b. And it impressed us with free cash flow of CN¥1.6b, being 144% of its EBIT. So we don't have any problem with Wangfujing Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Wangfujing Group is showing 1 warning sign in our investment analysis , you should know about...

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.