Meituan (HKG:3690) Could Easily Take On More Debt

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.' 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 Meituan (HKG:3690) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Meituan's Debt?

The chart below, which you can click on for greater detail, shows that Meituan had CN¥55.8b in debt in December 2024; about the same as the year before. However, its balance sheet shows it holds CN¥168.2b in cash, so it actually has CN¥112.5b net cash.

How Healthy Is Meituan's Balance Sheet?

The latest balance sheet data shows that Meituan had liabilities of CN¥107.9b due within a year, and liabilities of CN¥43.8b falling due after that. On the other hand, it had cash of CN¥168.2b and CN¥2.65b worth of receivables due within a year. So it can boast CN¥19.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Meituan could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Meituan has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Meituan

Even more impressive was the fact that Meituan grew its EBIT by 269% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Meituan can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Meituan may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Meituan actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Meituan has net cash of CN¥112.5b, as well as more liquid assets than liabilities. The cherry on top was that in converted 215% of that EBIT to free cash flow, bringing in CN¥57b. So we don't think Meituan's use of debt is risky. Another factor that would give us confidence in Meituan would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.