Does Wanda Hotel Development (HKG:169) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Wanda Hotel Development Company Limited (HKG:169) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. 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 Wanda Hotel Development

How Much Debt Does Wanda Hotel Development Carry?

The image below, which you can click on for greater detail, shows that Wanda Hotel Development had debt of HK$873.0m at the end of June 2021, a reduction from HK$4.06b over a year. However, it does have HK$2.67b in cash offsetting this, leading to net cash of HK$1.80b.

How Healthy Is Wanda Hotel Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wanda Hotel Development had liabilities of HK$3.29b due within 12 months and liabilities of HK$660.5m due beyond that. Offsetting this, it had HK$2.67b in cash and HK$388.9m in receivables that were due within 12 months. So its liabilities total HK$884.9m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$1.46b, so it does suggest shareholders should keep an eye on Wanda Hotel Development's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Wanda Hotel Development boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Wanda Hotel Development grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wanda Hotel Development'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Wanda Hotel Development 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. Over the last three years, Wanda Hotel Development saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although Wanda Hotel Development's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$1.80b. And we liked the look of last year's 63% year-on-year EBIT growth. So we are not troubled with Wanda Hotel Development's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Wanda Hotel Development that you should be aware of before investing here.

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. 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.
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