Wasion Holdings (HKG:3393) Could Easily Take On More Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Wasion Holdings Limited (HKG:3393) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wasion Holdings

What Is Wasion Holdings's Net Debt?

As you can see below, Wasion Holdings had CN¥2.51b of debt at December 2023, down from CN¥2.66b a year prior. However, it does have CN¥2.96b in cash offsetting this, leading to net cash of CN¥450.5m.

How Healthy Is Wasion Holdings' Balance Sheet?

The latest balance sheet data shows that Wasion Holdings had liabilities of CN¥6.23b due within a year, and liabilities of CN¥875.8m falling due after that. Offsetting this, it had CN¥2.96b in cash and CN¥4.96b in receivables that were due within 12 months. So it actually has CN¥816.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Wasion Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Wasion Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Wasion Holdings grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Wasion Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 last three years, Wasion Holdings reported free cash flow worth 20% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Wasion Holdings has net cash of CN¥450.5m, as well as more liquid assets than liabilities. And we liked the look of last year's 56% year-on-year EBIT growth. So is Wasion Holdings's debt a risk? It doesn't seem so to us. 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. Be aware that Wasion Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.