Is Meituan (HKG:3690) Using Debt In A Risky Way?

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. We note that Meituan (HKG:3690) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Meituan

What Is Meituan's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Meituan had CN¥55.2b of debt, an increase on CN¥7.86b, over one year. But on the other hand it also has CN¥120.9b in cash, leading to a CN¥65.7b net cash position.

How Healthy Is Meituan's Balance Sheet?

We can see from the most recent balance sheet that Meituan had liabilities of CN¥68.8b falling due within a year, and liabilities of CN¥44.6b due beyond that. On the other hand, it had cash of CN¥120.9b and CN¥1.66b worth of receivables due within a year. So it actually has CN¥9.18b more liquid assets than total liabilities.

This state of affairs indicates that Meituan's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥1.19t company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Meituan 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 it is future earnings, more than anything, that will determine Meituan's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Meituan reported revenue of CN¥167b, which is a gain of 60%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Meituan?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Meituan had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥14b of cash and made a loss of CN¥20b. Given it only has net cash of CN¥65.7b, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Meituan may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Meituan has 2 warning signs we think you should be aware of.

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.