Does Winox Holdings (HKG:6838) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Winox Holdings Limited (HKG:6838) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Winox Holdings

What Is Winox Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Winox Holdings had HK$120.3m of debt, an increase on HK$41.0m, over one year. However, it does have HK$167.9m in cash offsetting this, leading to net cash of HK$47.6m.

How Healthy Is Winox Holdings's Balance Sheet?

The latest balance sheet data shows that Winox Holdings had liabilities of HK$301.3m due within a year, and liabilities of HK$2.69m falling due after that. Offsetting these obligations, it had cash of HK$167.9m as well as receivables valued at HK$217.3m due within 12 months. So it can boast HK$81.2m more liquid assets than total liabilities.

This surplus suggests that Winox Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Winox Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Winox Holdings's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Winox 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Winox Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Winox Holdings's free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Winox Holdings has net cash of HK$47.6m, as well as more liquid assets than liabilities. So we are not troubled with Winox Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Winox Holdings , and understanding them should be part of your investment process.

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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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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