These 4 Measures Indicate That Winox Holdings (HKG:6838) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Winox Holdings Limited (HKG:6838) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Winox Holdings

What Is Winox Holdings's Debt?

As you can see below, at the end of June 2021, Winox Holdings had HK$156.1m of debt, up from HK$120.3m a year ago. Click the image for more detail. But on the other hand it also has HK$161.6m in cash, leading to a HK$5.53m net cash position.

How Strong Is Winox Holdings' Balance Sheet?

The latest balance sheet data shows that Winox Holdings had liabilities of HK$360.8m due within a year, and liabilities of HK$6.96m falling due after that. On the other hand, it had cash of HK$161.6m and HK$279.7m worth of receivables due within a year. So it can boast HK$73.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Winox Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Winox Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Winox Holdings's load is not too heavy, because its EBIT was down 31% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 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 Winox Holdings 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. Looking at the most recent three years, Winox Holdings recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Winox Holdings has HK$5.53m in net cash and a decent-looking balance sheet. So we don't have any problem with Winox Holdings's use of debt. 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. For example, we've discovered 3 warning signs for Winox Holdings that you should be aware of before investing here.

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. 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.
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