Is China Wantian Holdings (HKG:1854) A Risky Investment?

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.' 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. We note that China Wantian Holdings Limited (HKG:1854) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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 China Wantian Holdings

What Is China Wantian Holdings's Debt?

The image below, which you can click on for greater detail, shows that China Wantian Holdings had debt of HK$40.7m at the end of September 2021, a reduction from HK$46.0m over a year. But it also has HK$67.1m in cash to offset that, meaning it has HK$26.4m net cash.

How Healthy Is China Wantian Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Wantian Holdings had liabilities of HK$48.9m due within 12 months and liabilities of HK$1.85m due beyond that. Offsetting these obligations, it had cash of HK$67.1m as well as receivables valued at HK$26.7m due within 12 months. So it can boast HK$43.0m more liquid assets than total liabilities.

This surplus suggests that China Wantian Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Wantian Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is China Wantian Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China Wantian Holdings had a loss before interest and tax, and actually shrunk its revenue by 2.5%, to HK$121m. That's not what we would hope to see.

So How Risky Is China Wantian Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months China Wantian Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$2.6m and booked a HK$9.8m accounting loss. Given it only has net cash of HK$26.4m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for China Wantian Holdings (of which 1 shouldn't be ignored!) you should know about.

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. 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.