Rock star Growth Puts China e-Wallet Payment Group (HKG:802) In A Position To Use Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies China e-Wallet Payment Group Limited (HKG:802) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China e-Wallet Payment Group

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

You can click the graphic below for the historical numbers, but it shows that as of June 2021 China e-Wallet Payment Group had HK$21.0m of debt, an increase on none, over one year. But it also has HK$433.8m in cash to offset that, meaning it has HK$412.9m net cash.

A Look At China e-Wallet Payment Group's Liabilities

The latest balance sheet data shows that China e-Wallet Payment Group had liabilities of HK$12.9m due within a year, and liabilities of HK$24.9m falling due after that. Offsetting this, it had HK$433.8m in cash and HK$22.8m in receivables that were due within 12 months. So it actually has HK$418.8m 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, China e-Wallet Payment Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China e-Wallet Payment Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, China e-Wallet Payment Group reported revenue of HK$101m, which is a gain of 53%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is China e-Wallet Payment Group?

Although China e-Wallet Payment Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$37m. 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. Given it also grew revenue by 53% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that China e-Wallet Payment Group is showing 2 warning signs in our investment analysis , you should know about...

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.