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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, WenYi Trinity Technology Co., Ltd (SHSE:600520) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is WenYi Trinity Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that WenYi Trinity Technology had CN¥35.0m of debt in September 2024, down from CN¥96.8m, one year before. But on the other hand it also has CN¥173.6m in cash, leading to a CN¥138.6m net cash position.

A Look At WenYi Trinity Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that WenYi Trinity Technology had liabilities of CN¥183.9m due within 12 months and liabilities of CN¥5.58m due beyond that. Offsetting this, it had CN¥173.6m in cash and CN¥178.7m in receivables that were due within 12 months. So it can boast CN¥162.8m more liquid assets than total liabilities.

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

Better yet, WenYi Trinity Technology grew its EBIT by 121% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is WenYi Trinity Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While WenYi Trinity Technology 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, WenYi Trinity Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that WenYi Trinity Technology has net cash of CN¥138.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 223% of that EBIT to free cash flow, bringing in CN¥55m. So we don't think WenYi Trinity Technology's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for WenYi Trinity Technology (of which 1 can't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.