Does Weiqiao Textile (HKG:2698) Have A Healthy Balance Sheet?

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. Importantly, Weiqiao Textile Company Limited (HKG:2698) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Weiqiao Textile

What Is Weiqiao Textile's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Weiqiao Textile had CN¥2.26b of debt, an increase on CN¥2.11b, over one year. But it also has CN¥11.5b in cash to offset that, meaning it has CN¥9.22b net cash.

How Strong Is Weiqiao Textile's Balance Sheet?

The latest balance sheet data shows that Weiqiao Textile had liabilities of CN¥5.73b due within a year, and liabilities of CN¥179.2m falling due after that. Offsetting these obligations, it had cash of CN¥11.5b as well as receivables valued at CN¥352.7m due within 12 months. So it actually has CN¥5.92b more liquid assets than total liabilities.

This surplus strongly suggests that Weiqiao Textile has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Weiqiao Textile has more cash than debt is arguably a good indication that it can manage its debt safely.

While Weiqiao Textile doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Weiqiao Textile 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Weiqiao Textile 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. Happily for any shareholders, Weiqiao Textile actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Weiqiao Textile has CN¥9.22b in net cash and a strong balance sheet. And it impressed us with free cash flow of CN¥1.4b, being 193% of its EBIT. So we don't think Weiqiao Textile's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for Weiqiao Textile you should be aware of, and 1 of them makes us a bit uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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