Does Want Want China Holdings (HKG:151) Have A Healthy Balance Sheet?

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.' 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. We can see that Want Want China Holdings Limited (HKG:151) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Want Want China Holdings

What Is Want Want China Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Want Want China Holdings had CN¥6.90b of debt in March 2022, down from CN¥9.83b, one year before. However, its balance sheet shows it holds CN¥11.3b in cash, so it actually has CN¥4.39b net cash.

How Strong Is Want Want China Holdings' Balance Sheet?

According to the last reported balance sheet, Want Want China Holdings had liabilities of CN¥9.25b due within 12 months, and liabilities of CN¥3.90b due beyond 12 months. Offsetting these obligations, it had cash of CN¥11.3b as well as receivables valued at CN¥1.38b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥482.0m.

This state of affairs indicates that Want Want China Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥68.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Want Want China Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Want Want China Holdings saw its EBIT drop by 2.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Want Want China Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Want Want China Holdings 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. During the last three years, Want Want China Holdings generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Want Want China Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.39b. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in CN¥3.5b. So is Want Want China Holdings's debt a risk? It doesn't seem so to us. 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. Be aware that Want Want China Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.