Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Wiscom System Co., Ltd. (SZSE:002090) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Wiscom System
How Much Debt Does Wiscom System Carry?
As you can see below, Wiscom System had CN¥119.2m of debt at September 2023, down from CN¥171.5m a year prior. But on the other hand it also has CN¥738.7m in cash, leading to a CN¥619.6m net cash position.
How Healthy Is Wiscom System's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Wiscom System had liabilities of CN¥1.35b due within 12 months and liabilities of CN¥13.3m due beyond that. Offsetting these obligations, it had cash of CN¥738.7m as well as receivables valued at CN¥1.24b due within 12 months. So it actually has CN¥616.9m more liquid assets than total liabilities.
This surplus suggests that Wiscom System 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. Succinctly put, Wiscom System boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Wiscom System made a loss at the EBIT level, last year, it was also good to see that it generated CN¥12m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Wiscom System's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Wiscom System 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. Happily for any shareholders, Wiscom System actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company's debt, in this case Wiscom System has CN¥619.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥205m, being 1,697% of its EBIT. So is Wiscom System's debt a risk? It doesn't seem so to us. 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. For example Wiscom System has 3 warning signs (and 1 which shouldn't be ignored) we think 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.