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

Warren Buffett famously said, '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. As with many other companies Meituan (HKG:3690) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Meituan

What Is Meituan's Debt?

As you can see below, at the end of June 2022, Meituan had CN¥60.7b of debt, up from CN¥49.7b a year ago. Click the image for more detail. But it also has CN¥107.5b in cash to offset that, meaning it has CN¥46.9b net cash.

A Look At Meituan's Liabilities

According to the last reported balance sheet, Meituan had liabilities of CN¥66.1b due within 12 months, and liabilities of CN¥53.3b due beyond 12 months. On the other hand, it had cash of CN¥107.5b and CN¥14.8b worth of receivables due within a year. So it can boast CN¥2.86b 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 while it's hard to imagine that the CN¥906.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Meituan has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Meituan reported revenue of CN¥196b, which is a gain of 27%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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. And over the same period it saw negative free cash outflow of CN¥11b and booked a CN¥22b accounting loss. With only CN¥46.9b on the balance sheet, it would appear that its going to need to raise capital again 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Meituan 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.