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. We can see that Wuxi Double Elephant Micro Fibre Material Co.,Ltd (SZSE:002395) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

How Much Debt Does Wuxi Double Elephant Micro Fibre MaterialLtd Carry?

The image below, which you can click on for greater detail, shows that Wuxi Double Elephant Micro Fibre MaterialLtd had debt of CN¥104.9m at the end of March 2024, a reduction from CN¥115.0m over a year. However, its balance sheet shows it holds CN¥170.9m in cash, so it actually has CN¥66.0m net cash.

How Healthy Is Wuxi Double Elephant Micro Fibre MaterialLtd's Balance Sheet?

The latest balance sheet data shows that Wuxi Double Elephant Micro Fibre MaterialLtd had liabilities of CN¥679.8m due within a year, and liabilities of CN¥635.1m falling due after that. On the other hand, it had cash of CN¥170.9m and CN¥426.6m worth of receivables due within a year. So it has liabilities totalling CN¥717.3m more than its cash and near-term receivables, combined.

Given Wuxi Double Elephant Micro Fibre MaterialLtd has a market capitalization of CN¥4.27b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Wuxi Double Elephant Micro Fibre MaterialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Wuxi Double Elephant Micro Fibre MaterialLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥55m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Wuxi Double Elephant Micro Fibre MaterialLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Wuxi Double Elephant Micro Fibre MaterialLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Wuxi Double Elephant Micro Fibre MaterialLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although Wuxi Double Elephant Micro Fibre MaterialLtd'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¥66.0m. So we are not troubled with Wuxi Double Elephant Micro Fibre MaterialLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Wuxi Double Elephant Micro Fibre MaterialLtd that you should be aware of.

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.

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