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

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. As with many other companies Want Want China Holdings Limited (HKG:151) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Want Want China Holdings

What Is Want Want China Holdings's Net Debt?

As you can see below, Want Want China Holdings had CN¥5.34b of debt at March 2023, down from CN¥6.90b a year prior. However, its balance sheet shows it holds CN¥7.91b in cash, so it actually has CN¥2.57b 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¥8.77b due within 12 months and liabilities of CN¥2.50b due beyond that. Offsetting these obligations, it had cash of CN¥7.91b as well as receivables valued at CN¥853.9m due within 12 months. So its liabilities total CN¥2.51b more than the combination of its cash and short-term receivables.

Given Want Want China Holdings has a market capitalization of CN¥56.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Want Want China Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Want Want China Holdings has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Want Want China Holdings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Want Want China Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Want Want China Holdings produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Want Want China Holdings has CN¥2.57b in net cash. And it impressed us with free cash flow of CN¥3.4b, being 78% of its EBIT. So we don't have any problem with Want Want China Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Want Want China Holdings .

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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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.