Wuhu Token Sciences: Is Its Debt A Problem?

Wuhu Token Sciences's (SZSE:300088) debt is sitting at CN¥3.21b, 26% higher than one year ago. But the silver lining is that it has CN¥1.73b in cash, leading to net debt of about CN¥1.48b.

Legendary fund manager Li Lu, who Charlie Munger backed, once said: 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' Hence, it seems wise to examine whether Wuhu Token Sciences Co., Ltd. (SZSE:300088) carries any debt. Debt is a risky factor, so does Wuhu Token Sciences's debt level sound concerning to you?

What Does Debt Mean For Wuhu Token Sciences

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together. See our latest analysis for Wuhu Token Sciences

How Much Debt Does Wuhu Token Sciences Carry?

The image below, which you can click on for greater detail, shows that Wuhu Token Sciences had debt of CN¥3.21b at the end of September 2024, a an increase of CN¥1.95b over the year. But on the other hand it also had CN¥1.73b in cash, leading to a net debt of about CN¥1.48b. A Look At Wuhu Token Sciences's Liabilities We can see from the most recent balance sheet that Wuhu Token Sciences had liabilities of CN¥6.27b falling due within a year, and liabilities of CN¥865.1m due beyond that. Offsetting this, it had CN¥1.73b in cash and CN¥3.68b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.72b more than its cash and near-term receivables, combined. Since publicly traded Wuhu Token Sciences shares are worth a total of CN¥17.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it. While Wuhu Token Sciences's low debt to EBITDA ratio of 1.4 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 5.4 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Shareholders should be aware that Wuhu Token Sciences's EBIT was down 63% last year. If that decline continues then paying off debt will be harder than selling fois gras at a vegan convention. 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 Wuhu Token Sciences 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. Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Wuhu Token Sciences saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky. Our View On the face of it, Wuhu Token Sciences's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its net debt to EBITDA is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that Wuhu Token Sciences's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. The balance sheet is clearly the area to focus on when you are analysing debt. But every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has