Stock Analysis

Wing Tai Holdings (SGX:W05) Has A Pretty Healthy Balance Sheet

SGX:W05
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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.' 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 Wing Tai Holdings Limited (SGX:W05) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Wing Tai Holdings

How Much Debt Does Wing Tai Holdings Carry?

As you can see below, Wing Tai Holdings had S$708.7m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has S$786.5m in cash, leading to a S$77.8m net cash position.

debt-equity-history-analysis
SGX:W05 Debt to Equity History February 23rd 2021

How Strong Is Wing Tai Holdings' Balance Sheet?

We can see from the most recent balance sheet that Wing Tai Holdings had liabilities of S$213.9m falling due within a year, and liabilities of S$700.6m due beyond that. Offsetting these obligations, it had cash of S$786.5m as well as receivables valued at S$881.4m due within 12 months. So it actually has S$753.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Wing Tai Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Wing Tai Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Wing Tai Holdings's EBIT launched higher than Elon Musk, gaining a whopping 218% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wing Tai 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Wing Tai 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. In the last three years, Wing Tai Holdings created free cash flow amounting to 3.1% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Wing Tai Holdings has S$77.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 218% year-on-year EBIT growth. So is Wing Tai Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Wing Tai Holdings that you should be aware of.

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. 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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