Winox Holdings (HKG:6838) Seems To Use Debt Quite Sensibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Winox Holdings Limited (HKG:6838) does use debt in its business. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Winox Holdings Carry?

The chart below, which you can click on for greater detail, shows that Winox Holdings had HK$72.5m in debt in December 2020; about the same as the year before. But on the other hand it also has HK$174.6m in cash, leading to a HK$102.1m net cash position.

How Healthy Is Winox Holdings' Balance Sheet?

According to the last reported balance sheet, Winox Holdings had liabilities of HK$331.1m due within 12 months, and liabilities of HK$2.88m due beyond 12 months. On the other hand, it had cash of HK$174.6m and HK$307.6m worth of receivables due within a year. So it can boast HK$148.2m more liquid assets than total liabilities.

It's good to see that Winox Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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 33% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Winox Holdings created free cash flow amounting to 13% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Winox Holdings has net cash of HK$102.1m, as well as more liquid assets than liabilities. So we are not troubled with Winox Holdings's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Winox Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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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