Health Check: How Prudently Does World Houseware (Holdings) (HKG:713) Use Debt?

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. We note that World Houseware (Holdings) Limited (HKG:713) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for World Houseware (Holdings)

What Is World Houseware (Holdings)'s Debt?

The chart below, which you can click on for greater detail, shows that World Houseware (Holdings) had HK$273.4m in debt in December 2020; about the same as the year before. On the flip side, it has HK$119.9m in cash leading to net debt of about HK$153.5m.

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$548.0m due within 12 months and liabilities of HK$508.4m due beyond that. Offsetting these obligations, it had cash of HK$119.9m as well as receivables valued at HK$328.5m due within 12 months. So its liabilities total HK$607.9m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$642.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since World Houseware (Holdings) will need earnings to service that debt. 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.

Over 12 months, World Houseware (Holdings) saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, World Houseware (Holdings) had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$52m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of HK$69m and a profit of HK$69m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with World Houseware (Holdings) .

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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