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 note that Weihai Guangwei Composites Co., Ltd. (SZSE:300699) 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?

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. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Weihai Guangwei Composites Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Weihai Guangwei Composites had CN¥776.0m of debt, an increase on CN¥240.4m, over one year. But it also has CN¥1.13b in cash to offset that, meaning it has CN¥357.9m net cash.

How Healthy Is Weihai Guangwei Composites' Balance Sheet?

The latest balance sheet data shows that Weihai Guangwei Composites had liabilities of CN¥983.3m due within a year, and liabilities of CN¥819.6m falling due after that. Offsetting these obligations, it had cash of CN¥1.13b as well as receivables valued at CN¥1.95b due within 12 months. So it actually has CN¥1.28b more liquid assets than total liabilities.

This short term liquidity is a sign that Weihai Guangwei Composites could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Weihai Guangwei Composites boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Weihai Guangwei Composites saw its EBIT decline by 6.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Weihai Guangwei Composites'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Weihai Guangwei Composites 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 three years, Weihai Guangwei Composites reported free cash flow worth 10.0% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Weihai Guangwei Composites has CN¥357.9m in net cash and a decent-looking balance sheet. So we are not troubled with Weihai Guangwei Composites's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Weihai Guangwei Composites (of which 1 shouldn't be ignored!) you should know about.

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.