Is Winox Holdings (HKG:6838) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Winox Holdings Limited (HKG:6838) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that Winox Holdings had HK$46.0m of debt in June 2024, down from HK$70.5m, one year before. However, it does have HK$282.8m in cash offsetting this, leading to net cash of HK$236.8m.

How Strong Is Winox Holdings' Balance Sheet?

According to the last reported balance sheet, Winox Holdings had liabilities of HK$168.8m due within 12 months, and liabilities of HK$2.50m due beyond 12 months. Offsetting these obligations, it had cash of HK$282.8m as well as receivables valued at HK$187.3m due within 12 months. So it actually has HK$298.8m more liquid assets than total liabilities.

This surplus strongly suggests that Winox Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Winox Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Winox Holdings's saving grace is its low debt levels, because its EBIT has tanked 61% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Winox 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Winox Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Winox Holdings has net cash of HK$236.8m and plenty of liquid assets. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in HK$78m. So is Winox Holdings's debt a risk? It doesn't seem so to us. 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 learn about the 4 warning signs we've spotted with Winox Holdings (including 1 which is significant) .

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. 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.