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. As with many other companies Wuxi Lead Intelligent Equipment CO.,LTD. (SZSE:300450) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Wuxi Lead Intelligent EquipmentLTD's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Wuxi Lead Intelligent EquipmentLTD had debt of CN¥28.2m, up from none in one year. But it also has CN¥2.98b in cash to offset that, meaning it has CN¥2.95b net cash.

How Strong Is Wuxi Lead Intelligent EquipmentLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wuxi Lead Intelligent EquipmentLTD had liabilities of CN¥24.3b due within 12 months and liabilities of CN¥420.5m due beyond that. Offsetting this, it had CN¥2.98b in cash and CN¥14.6b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.07b.

This deficit isn't so bad because Wuxi Lead Intelligent EquipmentLTD is worth CN¥29.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Wuxi Lead Intelligent EquipmentLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Wuxi Lead Intelligent EquipmentLTD's load is not too heavy, because its EBIT was down 32% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Wuxi Lead Intelligent EquipmentLTD's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Wuxi Lead Intelligent EquipmentLTD 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, Wuxi Lead Intelligent EquipmentLTD recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

Although Wuxi Lead Intelligent EquipmentLTD's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥2.95b. So while Wuxi Lead Intelligent EquipmentLTD does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Wuxi Lead Intelligent EquipmentLTD (1 is potentially serious!) 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.

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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.