Is Wing Chi Holdings (HKG:6080) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Wing Chi Holdings Limited (HKG:6080) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wing Chi Holdings

What Is Wing Chi Holdings's Net Debt?

As you can see below, at the end of March 2024, Wing Chi Holdings had HK$12.2m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$45.6m in cash, so it actually has HK$33.5m net cash.

How Healthy Is Wing Chi Holdings' Balance Sheet?

According to the last reported balance sheet, Wing Chi Holdings had liabilities of HK$202.5m due within 12 months, and liabilities of HK$11.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$45.6m as well as receivables valued at HK$231.9m due within 12 months. So it can boast HK$63.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Wing Chi Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Wing Chi Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Wing Chi Holdings grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wing Chi Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Wing Chi Holdings 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. Over the last three years, Wing Chi Holdings recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Wing Chi Holdings has net cash of HK$33.5m and plenty of liquid assets. And it impressed us with free cash flow of HK$14m, being 89% of its EBIT. The bottom line is that we do not find Wing Chi Holdings's debt levels at all concerning. 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. Be aware that Wing Chi Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com