Meituan (HKG:3690) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Meituan (HKG:3690) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Meituan

How Much Debt Does Meituan Carry?

The chart below, which you can click on for greater detail, shows that Meituan had CN¥52.7b in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds CN¥112.0b in cash, so it actually has CN¥59.3b net cash.

How Strong Is Meituan's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Meituan had liabilities of CN¥76.4b due within 12 months and liabilities of CN¥39.3b due beyond that. Offsetting this, it had CN¥112.0b in cash and CN¥10.3b in receivables that were due within 12 months. So it actually has CN¥6.56b more liquid assets than 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¥709.9b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Meituan has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Meituan's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Meituan wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to CN¥220b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Meituan?

Although Meituan had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥5.7b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 23% is a good sign. We'd see further strong growth as an optimistic indication. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Meituan insider transactions.

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.