Is Wan Hai Lines (TWSE:2615) Using Too Much Debt?

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. We can see that Wan Hai Lines Ltd. (TWSE:2615) does use debt in its business. But is this debt a concern to shareholders?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Wan Hai Lines

How Much Debt Does Wan Hai Lines Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Wan Hai Lines had NT$74.3b of debt, an increase on NT$67.3b, over one year. But on the other hand it also has NT$143.7b in cash, leading to a NT$69.3b net cash position.

How Strong Is Wan Hai Lines' Balance Sheet?

According to the last reported balance sheet, Wan Hai Lines had liabilities of NT$47.9b due within 12 months, and liabilities of NT$100.0b due beyond 12 months. On the other hand, it had cash of NT$143.7b and NT$12.1b worth of receivables due within a year. So it can boast NT$7.88b more liquid assets than total liabilities.

This short term liquidity is a sign that Wan Hai Lines could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Wan Hai Lines has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Wan Hai Lines made a loss at the EBIT level, last year, it was also good to see that it generated NT$35b in EBIT over the last twelve months. 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 Wan Hai Lines's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Wan Hai Lines 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 year, Wan Hai Lines's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wan Hai Lines has NT$69.3b in net cash and a decent-looking balance sheet. So we don't have any problem with Wan Hai Lines's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wan Hai Lines (of which 1 doesn't sit too well with us!) 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.