Health Check: How Prudently Does Weimob (HKG:2013) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Weimob Inc. (HKG:2013) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Weimob

How Much Debt Does Weimob Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Weimob had CN¥4.37b of debt, an increase on CN¥1.95b, over one year. However, its balance sheet shows it holds CN¥5.18b in cash, so it actually has CN¥805.4m net cash.

A Look At Weimob's Liabilities

We can see from the most recent balance sheet that Weimob had liabilities of CN¥2.26b falling due within a year, and liabilities of CN¥4.17b due beyond that. Offsetting this, it had CN¥5.18b in cash and CN¥386.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥861.2m more than its cash and near-term receivables, combined.

Given Weimob has a market capitalization of CN¥18.6b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Weimob also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Weimob'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, Weimob reported revenue of CN¥2.4b, which is a gain of 38%, 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 Weimob?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Weimob 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¥645m and booked a CN¥1.2b accounting loss. With only CN¥805.4m 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, Weimob 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. For example - Weimob has 2 warning signs we think you should be aware of.

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.