Does World Houseware (Holdings) (HKG:713) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that World Houseware (Holdings) Limited (HKG:713) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for World Houseware (Holdings)

How Much Debt Does World Houseware (Holdings) Carry?

As you can see below, World Houseware (Holdings) had HK$26.3m of debt at June 2023, down from HK$131.3m a year prior. But it also has HK$746.9m in cash to offset that, meaning it has HK$720.6m net cash.

A Look At World Houseware (Holdings)'s Liabilities

Zooming in on the latest balance sheet data, we can see that World Houseware (Holdings) had liabilities of HK$1.14b due within 12 months and liabilities of HK$441.1m due beyond that. On the other hand, it had cash of HK$746.9m and HK$252.2m worth of receivables due within a year. So it has liabilities totalling HK$586.5m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$277.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, World Houseware (Holdings) would likely require a major re-capitalisation if it had to pay its creditors today. Given that World Houseware (Holdings) has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But it is World Houseware (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year World Houseware (Holdings) had a loss before interest and tax, and actually shrunk its revenue by 38%, to HK$489m. To be frank that doesn't bode well.

So How Risky Is World Houseware (Holdings)?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months World Houseware (Holdings) lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$86m and booked a HK$230m accounting loss. Given it only has net cash of HK$720.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 2 warning signs with World Houseware (Holdings) (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.