Is Wanjia Group Holdings (HKG:401) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Wanjia Group Holdings Limited (HKG:401) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wanjia Group Holdings

What Is Wanjia Group Holdings's Debt?

As you can see below, at the end of September 2024, Wanjia Group Holdings had HK$12.6m of debt, up from HK$4.34m a year ago. Click the image for more detail. But on the other hand it also has HK$32.1m in cash, leading to a HK$19.5m net cash position.

A Look At Wanjia Group Holdings' Liabilities

We can see from the most recent balance sheet that Wanjia Group Holdings had liabilities of HK$31.8m falling due within a year, 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 surplus strongly suggests that Wanjia Group Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Wanjia Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wanjia Group Holdings will need earnings to service that debt. 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.

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$7.0m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 3 warning signs with Wanjia Group Holdings , and understanding them should be part of your investment process.

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. 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.