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.' 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. Importantly, Wayzim Technology Co., Ltd. (SHSE:688211) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Wayzim Technology Carry?
The image below, which you can click on for greater detail, shows that Wayzim Technology had debt of CN¥20.0m at the end of September 2023, a reduction from CN¥119.7m over a year. But it also has CN¥1.67b in cash to offset that, meaning it has CN¥1.65b net cash.
How Strong Is Wayzim Technology's Balance Sheet?
The latest balance sheet data shows that Wayzim Technology had liabilities of CN¥2.99b due within a year, and liabilities of CN¥225.6m falling due after that. Offsetting this, it had CN¥1.67b in cash and CN¥684.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥852.1m more than its cash and near-term receivables, combined.
Since publicly traded Wayzim Technology shares are worth a total of CN¥4.40b, 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. Despite its noteworthy liabilities, Wayzim Technology boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Wayzim Technology 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.
Over 12 months, Wayzim Technology made a loss at the EBIT level, and saw its revenue drop to CN¥2.2b, which is a fall of 3.5%. We would much prefer see growth.
So How Risky Is Wayzim Technology?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Wayzim Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥214m and booked a CN¥156m accounting loss. With only CN¥1.65b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Wayzim Technology , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.