Is China e-Wallet Payment Group (HKG:802) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that China e-Wallet Payment Group Limited (HKG:802) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for China e-Wallet Payment Group

What Is China e-Wallet Payment Group's Net Debt?

The chart below, which you can click on for greater detail, shows that China e-Wallet Payment Group had HK$14.5m in debt in June 2023; about the same as the year before. However, its balance sheet shows it holds HK$314.5m in cash, so it actually has HK$300.0m net cash.

How Strong Is China e-Wallet Payment Group's Balance Sheet?

The latest balance sheet data shows that China e-Wallet Payment Group had liabilities of HK$19.8m due within a year, and liabilities of HK$15.1m falling due after that. Offsetting these obligations, it had cash of HK$314.5m as well as receivables valued at HK$40.6m due within 12 months. So it can boast HK$320.2m more liquid assets than total liabilities.

This surplus strongly suggests that China e-Wallet Payment Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, China e-Wallet Payment Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is China e-Wallet Payment Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year China e-Wallet Payment Group's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is China e-Wallet Payment Group?

While China e-Wallet Payment Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$4.1m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. 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. We've identified 1 warning sign with China e-Wallet Payment Group , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.