Is Meituan (HKG:3690) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Meituan (HKG:3690) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Meituan

What Is Meituan's Net Debt?

As you can see below, at the end of September 2022, Meituan had CN¥60.9b of debt, up from CN¥55.2b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥111.5b in cash, so it actually has CN¥50.6b net cash.

How Strong Is Meituan's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Meituan had liabilities of CN¥70.7b due within 12 months and liabilities of CN¥48.6b due beyond that. Offsetting these obligations, it had cash of CN¥111.5b as well as receivables valued at CN¥2.01b due within 12 months. So its liabilities total CN¥5.77b more than the combination of its cash and short-term receivables.

Having regard to Meituan's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥820.8b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Meituan also has more cash than debt, so we're pretty confident it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Meituan reported revenue of CN¥210b, which is a gain of 25%, 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?

While Meituan lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥2.2b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Meituan shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Meituan is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.