Is Wasion Holdings (HKG:3393) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Wasion Holdings Limited (HKG:3393) makes use of debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Wasion Holdings Carry?

As you can see below, Wasion Holdings had CN¥2.59b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥2.84b in cash offsetting this, leading to net cash of CN¥253.1m.

A Look At Wasion Holdings' Liabilities

The latest balance sheet data shows that Wasion Holdings had liabilities of CN¥7.38b due within a year, and liabilities of CN¥1.03b falling due after that. On the other hand, it had cash of CN¥2.84b and CN¥6.65b worth of receivables due within a year. So it can boast CN¥1.09b more liquid assets than total liabilities.

It's good to see that Wasion Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Wasion Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Wasion Holdings

Also positive, Wasion Holdings grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wasion Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wasion Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Wasion Holdings recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wasion Holdings has net cash of CN¥253.1m, as well as more liquid assets than liabilities. And we liked the look of last year's 28% year-on-year EBIT growth. So we don't think Wasion Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Wasion Holdings , and understanding them should be part of your investment process.

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.