Is Weimob (HKG:2013) 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.' 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 is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Weimob

What Is Weimob's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Weimob had CN¥3.08b of debt, an increase on CN¥1.95b, over one year. However, it does have CN¥5.18b in cash offsetting this, leading to net cash of CN¥2.10b.

A Look At Weimob's Liabilities

According to the last reported balance sheet, Weimob had liabilities of CN¥2.26b due within 12 months, and liabilities of CN¥4.41b due beyond 12 months. On the other hand, it had cash of CN¥5.18b and CN¥386.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.11b.

Of course, Weimob has a market capitalization of CN¥20.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Weimob 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, 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Weimob lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥645m and booked a CN¥1.2b accounting loss. Given it only has net cash of CN¥2.10b, the company may need to raise more capital if it doesn't reach break-even soon. Weimob's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 2 warning signs for Weimob that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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