We Think Want Want China Holdings (HKG:151) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Want Want China Holdings Limited (HKG:151) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Want Want China Holdings

How Much Debt Does Want Want China Holdings Carry?

As you can see below, at the end of September 2019, Want Want China Holdings had CN¥10.3b of debt, up from CN¥9.44b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥16.6b in cash, so it actually has CN¥6.30b net cash.

A Look At Want Want China Holdings's Liabilities

We can see from the most recent balance sheet that Want Want China Holdings had liabilities of CN¥6.31b falling due within a year, and liabilities of CN¥9.09b due beyond that. Offsetting this, it had CN¥16.6b in cash and CN¥939.1m in receivables that were due within 12 months. So it actually has CN¥2.18b more liquid assets than total liabilities.

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

Also good is that Want Want China Holdings grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Want Want China Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Want Want China Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Want Want China Holdings recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Want Want China Holdings has net cash of CN¥6.30b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥4.9b, being 91% of its EBIT. So is Want Want China 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Want Want China Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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