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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that WCON Electronics (Guangdong) Co., Ltd. (SZSE:301328) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is WCON Electronics (Guangdong)'s Debt?

You can click the graphic below for the historical numbers, but it shows that WCON Electronics (Guangdong) had CN¥32.0m of debt in March 2024, down from CN¥37.0m, one year before. But it also has CN¥1.16b in cash to offset that, meaning it has CN¥1.13b net cash.

A Look At WCON Electronics (Guangdong)'s Liabilities

The latest balance sheet data shows that WCON Electronics (Guangdong) had liabilities of CN¥100.1m due within a year, and liabilities of CN¥7.26m falling due after that. On the other hand, it had cash of CN¥1.16b and CN¥174.9m worth of receivables due within a year. So it actually has CN¥1.23b more liquid assets than total liabilities.

This surplus suggests that WCON Electronics (Guangdong) is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, WCON Electronics (Guangdong) boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that WCON Electronics (Guangdong)'s load is not too heavy, because its EBIT was down 35% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if WCON Electronics (Guangdong) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. WCON Electronics (Guangdong) 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. During the last three years, WCON Electronics (Guangdong) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that WCON Electronics (Guangdong) has net cash of CN¥1.13b, as well as more liquid assets than liabilities. So we don't have any problem with WCON Electronics (Guangdong)'s use of debt. 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 3 warning signs with WCON Electronics (Guangdong) (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com