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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Want Want China Holdings Limited (HKG:151) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Want Want China Holdings's Debt?

The image below, which you can click on for greater detail, shows that Want Want China Holdings had debt of CN¥6.33b at the end of September 2024, a reduction from CN¥7.63b over a year. But on the other hand it also has CN¥7.86b in cash, leading to a CN¥1.52b net cash position.

How Healthy Is Want Want China Holdings' Balance Sheet?

The latest balance sheet data shows that Want Want China Holdings had liabilities of CN¥11.1b due within a year, and liabilities of CN¥256.3m falling due after that. On the other hand, it had cash of CN¥7.86b and CN¥879.3m worth of receivables due within a year. So its liabilities total CN¥2.67b more than the combination of its cash and short-term receivables.

Given Want Want China Holdings has a market capitalization of CN¥53.8b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

View our latest analysis for Want Want China Holdings

The good news is that Want Want China Holdings has increased its EBIT by 7.7% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 produced sturdy free cash flow equating to 77% 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¥1.52b in net cash. And it impressed us with free cash flow of CN¥4.3b, being 77% of its EBIT. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Want Want China Holdings you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.