Wangfujing Group (SHSE:600859) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Wangfujing Group Co., Ltd. (SHSE:600859) does carry debt. But should shareholders be worried about its use of debt?

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

How Much Debt Does Wangfujing Group Carry?

The chart below, which you can click on for greater detail, shows that Wangfujing Group had CN¥1.89b in debt in September 2024; about the same as the year before. However, it does have CN¥9.63b in cash offsetting this, leading to net cash of CN¥7.74b.

How Strong Is Wangfujing Group's Balance Sheet?

According to the last reported balance sheet, Wangfujing Group had liabilities of CN¥7.85b due within 12 months, and liabilities of CN¥12.3b due beyond 12 months. On the other hand, it had cash of CN¥9.63b and CN¥527.3m worth of receivables due within a year. So its liabilities total CN¥10.0b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥15.5b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Wangfujing Group boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Wangfujing Group

While Wangfujing Group doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Wangfujing Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Wangfujing Group 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. Happily for any shareholders, Wangfujing Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Wangfujing Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥7.74b. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in CN¥1.6b. So we don't have any problem with Wangfujing Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Wangfujing Group that you should be aware of before investing here.

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.