Is Want Want China Holdings (HKG:151) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Want Want China Holdings Limited (HKG:151) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Want Want China Holdings

What Is Want Want China Holdings's Net Debt?

As you can see below, at the end of March 2021, Want Want China Holdings had CN¥9.83b of debt, up from CN¥8.88b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥16.1b in cash, so it actually has CN¥6.25b net cash.

A Look At Want Want China Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Want Want China Holdings had liabilities of CN¥9.17b due within 12 months and liabilities of CN¥7.11b due beyond that. Offsetting this, it had CN¥16.1b in cash and CN¥920.0m in receivables that were due within 12 months. So it actually has CN¥729.7m more liquid assets than total liabilities.

Having regard to Want Want China Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥56.0b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Want Want China Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Want Want China Holdings grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Want Want China Holdings has CN¥6.25b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in CN¥5.0b. So is Want Want China Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Want Want China Holdings you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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