Health Check: How Prudently Does WWPKG Holdings (HKG:8069) Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that WWPKG Holdings Company Limited (HKG:8069) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for WWPKG Holdings

What Is WWPKG Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 WWPKG Holdings had debt of HK$12.5m, up from HK$7.22m in one year. But it also has HK$14.0m in cash to offset that, meaning it has HK$1.46m net cash.

A Look At WWPKG Holdings' Liabilities

We can see from the most recent balance sheet that WWPKG Holdings had liabilities of HK$11.7m falling due within a year, and liabilities of HK$5.56m due beyond that. Offsetting this, it had HK$14.0m in cash and HK$79.0k in receivables that were due within 12 months. So it has liabilities totalling HK$3.19m more than its cash and near-term receivables, combined.

Since publicly traded WWPKG Holdings shares are worth a total of HK$144.0m, it seems unlikely that this level of liabilities would be a major threat. 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, WWPKG 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 WWPKG 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, WWPKG Holdings made a loss at the EBIT level, and saw its revenue drop to HK$1.6m, which is a fall of 97%. That makes us nervous, to say the least.

So How Risky Is WWPKG Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months WWPKG Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$17m of cash and made a loss of HK$13m. But at least it has HK$1.46m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for WWPKG Holdings (3 don't sit too well with us!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.