We Think Meituan (HKG:3690) Can Manage Its Debt With Ease

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Meituan (HKG:3690) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Meituan

How Much Debt Does Meituan Carry?

As you can see below, Meituan had CN¥57.2b of debt at September 2023, down from CN¥60.9b a year prior. However, its balance sheet shows it holds CN¥133.6b in cash, so it actually has CN¥76.5b net cash.

How Strong Is Meituan's Balance Sheet?

According to the last reported balance sheet, Meituan had liabilities of CN¥97.6b due within 12 months, and liabilities of CN¥40.1b due beyond 12 months. Offsetting these obligations, it had cash of CN¥133.6b as well as receivables valued at CN¥2.93b 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¥455.2b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Meituan also has more cash than debt, so we're pretty confident it can manage its debt safely.

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¥7.2b. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Meituan actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Meituan has CN¥76.5b in net cash. And it impressed us with free cash flow of CN¥30b, being 411% of its EBIT. So we don't think Meituan's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Meituan .

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.