WEILONG Delicious Global Holdings (HKG:9985) Could Easily Take On More Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, WEILONG Delicious Global Holdings Ltd (HKG:9985) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Net Debt?

As you can see below, WEILONG Delicious Global Holdings had CN¥179.1m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.52b in cash offsetting this, leading to net cash of CN¥1.34b.

A Look At WEILONG Delicious Global Holdings' Liabilities

The latest balance sheet data shows that WEILONG Delicious Global Holdings had liabilities of CN¥969.7m due within a year, and liabilities of CN¥470.9m falling due after that. On the other hand, it had cash of CN¥1.52b and CN¥254.2m worth of receivables due within a year. So it actually has CN¥331.8m 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.

Another good sign is that WEILONG Delicious Global Holdings has been able to increase its EBIT by 28% in twelve months, making it easier to pay down 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 WEILONG Delicious Global 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, WEILONG Delicious Global Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case WEILONG Delicious Global Holdings has CN¥1.34b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.3b, being 100% of its EBIT. So is WEILONG Delicious Global Holdings's debt a risk? It doesn't seem so to us. Given WEILONG Delicious Global Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.