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. Importantly, World Houseware (Holdings) Limited (HKG:713) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for World Houseware (Holdings)

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

As you can see below, World Houseware (Holdings) had HK$131.3m of debt at June 2022, down from HK$197.3m a year prior. But it also has HK$715.2m in cash to offset that, meaning it has HK$583.9m net cash.

How Healthy 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$1.19b due within 12 months and liabilities of HK$586.9m due beyond that. Offsetting these obligations, it had cash of HK$715.2m as well as receivables valued at HK$317.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$745.4m.

The deficiency here weighs heavily on the HK$403.6m 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. At the end of the day, World Houseware (Holdings) would probably need a major re-capitalization if its creditors were to demand repayment. World Houseware (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, World Houseware (Holdings) made a loss at the EBIT level, and saw its revenue drop to HK$788m, which is a fall of 14%. That's not what we would hope to see.

So How Risky Is World Houseware (Holdings)?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year World Houseware (Holdings) had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$87m of cash and made a loss of HK$94m. Given it only has net cash of HK$583.9m, 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. For example World Houseware (Holdings) has 2 warning signs (and 1 which is a bit unpleasant) we think 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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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.