Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Ve Wong Corporation (TPE:1203) does carry debt. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Ve Wong
What Is Ve Wong's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Ve Wong had NT$663.0m of debt, an increase on NT$613.0m, over one year. However, it does have NT$1.90b in cash offsetting this, leading to net cash of NT$1.24b.
How Strong Is Ve Wong's Balance Sheet?
We can see from the most recent balance sheet that Ve Wong had liabilities of NT$1.76b falling due within a year, and liabilities of NT$1.42b due beyond that. On the other hand, it had cash of NT$1.90b and NT$553.7m worth of receivables due within a year. So it has liabilities totalling NT$727.8m more than its cash and near-term receivables, combined.
Since publicly traded Ve Wong shares are worth a total of NT$9.03b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Ve Wong boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Ve Wong has increased its EBIT by 2.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ve Wong's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ve Wong 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, Ve Wong recorded free cash flow worth 66% 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
We could understand if investors are concerned about Ve Wong's liabilities, but we can be reassured by the fact it has has net cash of NT$1.24b. And it impressed us with free cash flow of NT$659m, being 66% of its EBIT. So is Ve Wong'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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Ve Wong 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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About TWSE:1203
Ve Wong
Produces and distributes foods, drinks, and seasonings in Taiwan, Thailand, and Vietnam.
Excellent balance sheet established dividend payer.
