We Think WEILONG Delicious Global Holdings (HKG:9985) 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.' 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. Importantly, WEILONG Delicious Global Holdings Ltd (HKG:9985) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out our latest analysis for WEILONG Delicious Global Holdings

What Is WEILONG Delicious Global Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 WEILONG Delicious Global Holdings had CN¥180.9m of debt, an increase on CN¥161.3m, over one year. However, it does have CN¥2.25b in cash offsetting this, leading to net cash of CN¥2.07b.

How Healthy Is WEILONG Delicious Global Holdings' Balance Sheet?

We can see from the most recent balance sheet that WEILONG Delicious Global Holdings had liabilities of CN¥908.0m falling due within a year, and liabilities of CN¥439.7m due beyond that. Offsetting this, it had CN¥2.25b in cash and CN¥148.9m in receivables that were due within 12 months. So it can boast CN¥1.05b more liquid assets than total liabilities.

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

Even more impressive was the fact that WEILONG Delicious Global Holdings grew its EBIT by 238% over twelve months. That boost will make it even easier to pay down debt going forward. 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 WEILONG Delicious Global Holdings's ability to maintain a healthy balance sheet going forward. 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 WEILONG Delicious Global 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. Over the last three years, WEILONG Delicious Global Holdings recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case WEILONG Delicious Global Holdings has CN¥2.07b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.0b, being 98% of its EBIT. So we don't think WEILONG Delicious Global Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - WEILONG Delicious Global Holdings has 1 warning sign we think 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.