Is Weiye Holdings (HKG:1570) Using Too Much Debt?

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.' 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. We can see that Weiye Holdings Limited (HKG:1570) does use debt in its business. But should shareholders be worried about its use of debt?

Our free stock report includes 3 warning signs investors should be aware of before investing in Weiye Holdings. Read for free now.

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Weiye Holdings Carry?

As you can see below, at the end of December 2024, Weiye Holdings had CN¥988.6m of debt, up from CN¥806.7m a year ago. Click the image for more detail. On the flip side, it has CN¥70.8m in cash leading to net debt of about CN¥917.8m.

A Look At Weiye Holdings' Liabilities

We can see from the most recent balance sheet that Weiye Holdings had liabilities of CN¥1.97b falling due within a year, and liabilities of CN¥412.3m due beyond that. On the other hand, it had cash of CN¥70.8m and CN¥666.8m worth of receivables due within a year. So it has liabilities totalling CN¥1.64b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥320.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Weiye Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Weiye Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Weiye Holdings

In the last year Weiye Holdings had a loss before interest and tax, and actually shrunk its revenue by 97%, to CN¥43m. To be frank that doesn't bode well.

Caveat Emptor

While Weiye Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥115m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥187m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Weiye Holdings (of which 2 make us uncomfortable!) 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.