WebX International Holdings (HKG:8521) Has A Pretty 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, WebX International Holdings Company Limited (HKG:8521) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for WebX International Holdings

What Is WebX International Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that WebX International Holdings had HK$34.7m in debt in June 2024; about the same as the year before. However, it does have HK$58.0m in cash offsetting this, leading to net cash of HK$23.3m.

How Strong Is WebX International Holdings' Balance Sheet?

According to the last reported balance sheet, WebX International Holdings had liabilities of HK$43.6m due within 12 months, and liabilities of HK$4.72m due beyond 12 months. Offsetting this, it had HK$58.0m in cash and HK$44.6m in receivables that were due within 12 months. So it can boast HK$54.2m more liquid assets than total liabilities.

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

We also note that WebX International Holdings improved its EBIT from a last year's loss to a positive HK$5.3m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is WebX International Holdings's earnings that will influence how the balance sheet holds up in the future. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While WebX International 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. During the last year, WebX International Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case WebX International Holdings has HK$23.3m in net cash and a decent-looking balance sheet. So we don't have any problem with WebX International Holdings's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with WebX International Holdings (including 2 which shouldn't be ignored) .

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.