Stock Analysis

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

SGX:W05
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Wing Tai Holdings Limited (SGX:W05) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Wing Tai Holdings

What Is Wing Tai Holdings's Net Debt?

As you can see below, Wing Tai Holdings had S$727.2m of debt at June 2021, down from S$789.3m a year prior. But on the other hand it also has S$809.0m in cash, leading to a S$81.8m net cash position.

debt-equity-history-analysis
SGX:W05 Debt to Equity History December 22nd 2021

How Healthy Is Wing Tai Holdings' Balance Sheet?

We can see from the most recent balance sheet that Wing Tai Holdings had liabilities of S$298.9m falling due within a year, and liabilities of S$638.2m due beyond that. Offsetting these obligations, it had cash of S$809.0m as well as receivables valued at S$972.6m due within 12 months. So it can boast S$844.6m more liquid assets than total liabilities.

This surplus strongly suggests that Wing Tai Holdings 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. 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.

Also relevant is that Wing Tai Holdings has grown its EBIT by a very respectable 21% in the last year, thus enhancing its ability to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wing Tai Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Wing Tai Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Wing Tai Holdings has net cash of S$81.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 21% year-on-year EBIT growth. So we don't have any problem with Wing Tai Holdings's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Wing Tai Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Wing Tai Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.