Here's Why Wens Foodstuff Group (SZSE:300498) Can Afford Some Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Wens Foodstuff Group Co., Ltd. (SZSE:300498) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Wens Foodstuff Group

What Is Wens Foodstuff Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Wens Foodstuff Group had CN¥29.7b of debt in March 2024, down from CN¥31.9b, one year before. However, it does have CN¥11.5b in cash offsetting this, leading to net debt of about CN¥18.2b.

How Strong Is Wens Foodstuff Group's Balance Sheet?

According to the last reported balance sheet, Wens Foodstuff Group had liabilities of CN¥32.3b due within 12 months, and liabilities of CN¥27.7b due beyond 12 months. Offsetting these obligations, it had cash of CN¥11.5b as well as receivables valued at CN¥2.15b due within 12 months. So it has liabilities totalling CN¥46.4b more than its cash and near-term receivables, combined.

Wens Foodstuff Group has a very large market capitalization of CN¥131.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wens Foodstuff Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Wens Foodstuff Group reported revenue of CN¥92b, which is a gain of 3.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Wens Foodstuff Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥3.5b 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¥4.9b into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Wens Foodstuff Group you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.