Meituan (HKG:3690) Has A Pretty Healthy Balance Sheet

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 Meituan (HKG:3690) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Meituan

What Is Meituan's Net Debt?

The image below, which you can click on for greater detail, shows that Meituan had debt of CN¥54.0b at the end of June 2023, a reduction from CN¥60.7b over a year. But it also has CN¥120.2b in cash to offset that, meaning it has CN¥66.2b net cash.

How Healthy Is Meituan's Balance Sheet?

The latest balance sheet data shows that Meituan had liabilities of CN¥84.4b due within a year, and liabilities of CN¥39.6b falling due after that. Offsetting these obligations, it had cash of CN¥120.2b as well as receivables valued at CN¥2.43b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Meituan's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥713.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Meituan boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Meituan turned things around in the last 12 months, delivering and EBIT of CN¥5.0b. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Meituan can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Meituan 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. Over the last year, 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

We could understand if investors are concerned about Meituan's liabilities, but we can be reassured by the fact it has has net cash of CN¥66.2b. The cherry on top was that in converted 534% of that EBIT to free cash flow, bringing in CN¥27b. So we don't think Meituan's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Meituan has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.