Does Winning Tower Group Holdings (HKG:8362) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Winning Tower Group Holdings Limited (HKG:8362) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Winning Tower Group Holdings

What Is Winning Tower Group Holdings's Debt?

As you can see below, Winning Tower Group Holdings had HK$24.4m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$29.0m in cash offsetting this, leading to net cash of HK$4.66m.

A Look At Winning Tower Group Holdings' Liabilities

The latest balance sheet data shows that Winning Tower Group Holdings had liabilities of HK$16.9m due within a year, and liabilities of HK$26.4m falling due after that. Offsetting these obligations, it had cash of HK$29.0m as well as receivables valued at HK$6.59m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$7.64m.

Of course, Winning Tower Group Holdings has a market capitalization of HK$65.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Winning Tower Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Winning Tower Group 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.

Over 12 months, Winning Tower Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$80m, which is a fall of 10%. That's not what we would hope to see.

So How Risky Is Winning Tower Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Winning Tower Group 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$6.4m and booked a HK$11m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$4.66m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Winning Tower Group Holdings has 2 warning signs we think you should be aware of.

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.

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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