Does Wanjia Group Holdings (HKG:401) Have A Healthy Balance Sheet?

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 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 Wanjia Group Holdings Limited (HKG:401) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Wanjia Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Wanjia Group Holdings had debt of HK$12.6m, up from HK$4.34m in one year. However, its balance sheet shows it holds HK$32.1m in cash, so it actually has HK$19.5m net cash.

How Strong Is Wanjia Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wanjia Group Holdings had liabilities of HK$31.8m due within 12 months and liabilities of HK$10.6m due beyond that. Offsetting this, it had HK$32.1m in cash and HK$26.4m in receivables that were due within 12 months. So it actually has HK$16.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Wanjia Group Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Wanjia Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Wanjia Group Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

View our latest analysis for Wanjia Group Holdings

In the last year Wanjia Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 3.1%, to HK$171m. That's not what we would hope to see.

So How Risky Is Wanjia Group Holdings?

While Wanjia Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$7.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Wanjia Group Holdings has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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.