Is Wan Cheng Metal Packaging (HKG:8291) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Wan Cheng Metal Packaging Company Limited (HKG:8291) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Wan Cheng Metal Packaging

What Is Wan Cheng Metal Packaging's Net Debt?

As you can see below, Wan Cheng Metal Packaging had CN¥52.9m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥2.92m in cash leading to net debt of about CN¥50.0m.

How Healthy Is Wan Cheng Metal Packaging's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wan Cheng Metal Packaging had liabilities of CN¥92.0m due within 12 months and liabilities of CN¥2.62m due beyond that. Offsetting this, it had CN¥2.92m in cash and CN¥44.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥47.4m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥41.0m, we think shareholders really should watch Wan Cheng Metal Packaging's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wan Cheng Metal Packaging 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 Wan Cheng Metal Packaging had a loss before interest and tax, and actually shrunk its revenue by 70%, to CN¥29m. To be frank that doesn't bode well.

Caveat Emptor

While Wan Cheng Metal Packaging's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥34m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥6.3m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 6 warning signs for Wan Cheng Metal Packaging (of which 4 are potentially serious!) you should know about.

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. 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.
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