We Think Want Want China Holdings (HKG:151) Can Manage Its Debt With Ease

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.' 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. As with many other companies Want Want China Holdings Limited (HKG:151) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Want Want China Holdings

What Is Want Want China Holdings's Debt?

As you can see below, Want Want China Holdings had CN¥10.2b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥17.3b in cash to offset that, meaning it has CN¥7.12b net cash.

How Healthy Is Want Want China Holdings' Balance Sheet?

The latest balance sheet data shows that Want Want China Holdings had liabilities of CN¥12.0b due within a year, and liabilities of CN¥3.84b falling due after that. Offsetting these obligations, it had cash of CN¥17.3b as well as receivables valued at CN¥933.6m due within 12 months. So it can boast CN¥2.42b more liquid assets than total liabilities.

This short term liquidity is a sign that Want Want China Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Want Want China Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Want Want China Holdings grew its EBIT by 10% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Want Want China Holdings has net cash of CN¥7.12b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥5.0b, being 93% of its EBIT. So we don't think Want Want China Holdings's use of debt is risky. 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. Be aware that Want Want China Holdings is showing 2 warning signs 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. 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.
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