Is Meituan (HKG:3690) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Meituan (HKG:3690) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out our latest analysis for Meituan

How Much Debt Does Meituan Carry?

As you can see below, at the end of December 2021, Meituan had CN¥54.2b of debt, up from CN¥21.4b a year ago. Click the image for more detail. But on the other hand it also has CN¥116.8b in cash, leading to a CN¥62.6b net cash position.

A Look At Meituan's Liabilities

According to the last reported balance sheet, Meituan had liabilities of CN¥68.6b due within 12 months, and liabilities of CN¥46.5b due beyond 12 months. Offsetting this, it had CN¥116.8b in cash and CN¥10.3b in receivables that were due within 12 months. So it can boast CN¥12.0b more liquid assets than total liabilities.

Having regard to Meituan's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥822.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Meituan boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Meituan can strengthen its balance sheet over time. 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¥179b, which is a gain of 56%, 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 we do note that Meituan had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥13b and booked a CN¥24b accounting loss. Given it only has net cash of CN¥62.6b, the company may need to raise more capital if it doesn't reach break-even soon. Meituan's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Meituan 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.