These 4 Measures Indicate That Wanka Online (HKG:1762) Is Using Debt Reasonably Well

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.' 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. We can see that Wanka Online Inc. (HKG:1762) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Wanka Online

What Is Wanka Online's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Wanka Online had debt of CN¥391.0m, up from CN¥209.4m in one year. But on the other hand it also has CN¥569.7m in cash, leading to a CN¥178.7m net cash position.

A Look At Wanka Online's Liabilities

The latest balance sheet data shows that Wanka Online had liabilities of CN¥703.8m due within a year, and liabilities of CN¥4.46m falling due after that. Offsetting this, it had CN¥569.7m in cash and CN¥813.3m in receivables that were due within 12 months. So it can boast CN¥674.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Wanka Online's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Wanka Online has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Wanka Online improved its EBIT from a last year's loss to a positive CN¥45m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wanka Online's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wanka Online may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Wanka Online burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wanka Online has CN¥178.7m in net cash and a strong balance sheet. So we don't have any problem with Wanka Online's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wanka Online you should know about.

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.