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 Wison Engineering Services Co. Ltd. (HKG:2236) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Wison Engineering Services
What Is Wison Engineering Services's Net Debt?
As you can see below, Wison Engineering Services had CN„1.10b of debt at June 2024, down from CN„1.15b a year prior. However, its balance sheet shows it holds CN„1.49b in cash, so it actually has CN„386.4m net cash.
How Strong Is Wison Engineering Services' Balance Sheet?
According to the last reported balance sheet, Wison Engineering Services had liabilities of CN„6.29b due within 12 months, and liabilities of CN„1.63b due beyond 12 months. Offsetting these obligations, it had cash of CN„1.49b as well as receivables valued at CN„1.96b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN„4.46b.
This deficit casts a shadow over the CN„570.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Wison Engineering Services would probably need a major re-capitalization if its creditors were to demand repayment. Given that Wison Engineering Services has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wison Engineering Services will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Wison Engineering Services made a loss at the EBIT level, and saw its revenue drop to CN„3.8b, which is a fall of 13%. That's not what we would hope to see.
So How Risky Is Wison Engineering Services?
While Wison Engineering Services lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN„629m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Wison Engineering Services (of which 1 shouldn't be ignored!) you should know about.
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.
Valuation is complex, but we're here to simplify it.
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About SEHK:2236
Wison Engineering Services
An investment holding company, provides chemical engineering, procurement, and construction management services in Mainland China, the United States, the Middle East, Europe, and internationally.
Excellent balance sheet and good value.