Is Wellhope Foods (SHSE:603609) A Risky Investment?

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.' 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. As with many other companies Wellhope Foods Co., Ltd. (SHSE:603609) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Wellhope Foods

How Much Debt Does Wellhope Foods Carry?

The chart below, which you can click on for greater detail, shows that Wellhope Foods had CN¥4.12b in debt in September 2024; about the same as the year before. However, it does have CN¥1.62b in cash offsetting this, leading to net debt of about CN¥2.50b.

How Strong Is Wellhope Foods' Balance Sheet?

The latest balance sheet data shows that Wellhope Foods had liabilities of CN¥3.99b due within a year, and liabilities of CN¥3.65b falling due after that. On the other hand, it had cash of CN¥1.62b and CN¥1.62b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.40b.

Wellhope Foods has a market capitalization of CN¥7.73b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Wellhope Foods's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Wellhope Foods made a loss at the EBIT level, and saw its revenue drop to CN¥33b, which is a fall of 8.6%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Wellhope Foods produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥22m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥207m into a profit. In the meantime, we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Wellhope Foods's profit, revenue, and operating cashflow have changed over the last few years.

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.