Is China e-Wallet Payment Group (HKG:802) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 China e-Wallet Payment Group Limited (HKG:802) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China e-Wallet Payment Group

What Is China e-Wallet Payment Group's Net Debt?

The chart below, which you can click on for greater detail, shows that China e-Wallet Payment Group had HK$15.0m in debt in June 2019; about the same as the year before. However, it does have HK$508.2m in cash offsetting this, leading to net cash of HK$493.3m.

How Healthy Is China e-Wallet Payment Group's Balance Sheet?

According to the last reported balance sheet, China e-Wallet Payment Group had liabilities of HK$55.1m due within 12 months, and liabilities of HK$11.0m due beyond 12 months. Offsetting this, it had HK$508.2m in cash and HK$43.9m in receivables that were due within 12 months. So it actually has HK$486.0m more liquid assets than total liabilities.

This surplus liquidity suggests that China e-Wallet Payment Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, China e-Wallet Payment Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China e-Wallet Payment Group 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.

Over 12 months, China e-Wallet Payment Group reported revenue of HK$90m, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is China e-Wallet Payment Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that China e-Wallet Payment Group had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through HK$39m of cash and made a loss of HK$64m. But the saving grace is the HK$493.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. China e-Wallet Payment Group's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that China e-Wallet Payment Group is showing 5 warning signs in our investment analysis , 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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