Is World Houseware (Holdings) (HKG:713) Weighed On By Its Debt Load?

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

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for World Houseware (Holdings)

What Is World Houseware (Holdings)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that World Houseware (Holdings) had HK$207.2m of debt in June 2020, down from HK$361.4m, one year before. However, it does have HK$53.2m in cash offsetting this, leading to net debt of about HK$154.0m.

How Strong Is World Houseware (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that World Houseware (Holdings) had liabilities of HK$468.8m due within 12 months and liabilities of HK$441.7m due beyond that. Offsetting this, it had HK$53.2m in cash and HK$288.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$569.1m.

The deficiency here weighs heavily on the HK$279.0m 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'd watch its balance sheet closely, without a doubt. After all, World Houseware (Holdings) would likely require a major re-capitalisation if it had to pay its creditors today. 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 20%, to HK$722m. To be frank that doesn't bode well.

Caveat Emptor

While World Houseware (Holdings)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$104m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of HK$187m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that World Houseware (Holdings) is showing 2 warning signs in our investment analysis , you should know about...

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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