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. As with many other companies Wonders Information Co., Ltd (SZSE:300168) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Wonders Information
How Much Debt Does Wonders Information Carry?
You can click the graphic below for the historical numbers, but it shows that Wonders Information had CN¥2.91b of debt in September 2023, down from CN¥3.79b, one year before. On the flip side, it has CN¥1.45b in cash leading to net debt of about CN¥1.46b.
How Healthy Is Wonders Information's Balance Sheet?
The latest balance sheet data shows that Wonders Information had liabilities of CN¥3.37b due within a year, and liabilities of CN¥978.9m falling due after that. Offsetting these obligations, it had cash of CN¥1.45b as well as receivables valued at CN¥1.51b due within 12 months. So it has liabilities totalling CN¥1.39b more than its cash and near-term receivables, combined.
Since publicly traded Wonders Information shares are worth a total of CN¥12.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wonders Information can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Wonders Information had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to CN¥2.9b. That's not what we would hope to see.
Caveat Emptor
Importantly, Wonders Information had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥287m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥399m of cash over the last year. So suffice it to say we do consider the stock to be 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 example, we've discovered 1 warning sign for Wonders Information that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.
