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. We can see that WEILONG Delicious Global Holdings Ltd (HKG:9985) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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.
What Is WEILONG Delicious Global Holdings's Net Debt?
As you can see below, at the end of December 2023, WEILONG Delicious Global Holdings had CN¥180.9m of debt, up from CN¥161.3m a year ago. Click the image for more detail. However, it does have CN¥2.25b in cash offsetting this, leading to net cash of CN¥2.07b.
A Look At WEILONG Delicious Global Holdings' Liabilities
According to the last reported balance sheet, WEILONG Delicious Global Holdings had liabilities of CN¥908.0m due within 12 months, and liabilities of CN¥439.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.25b as well as receivables valued at CN¥148.9m due within 12 months. So it actually has CN¥1.05b more liquid assets than total liabilities.
This surplus suggests that WEILONG Delicious Global Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, WEILONG Delicious Global Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, WEILONG Delicious Global Holdings grew its EBIT by 238% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WEILONG Delicious Global 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While WEILONG Delicious Global 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. Happily for any shareholders, WEILONG Delicious Global Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that WEILONG Delicious Global Holdings has net cash of CN¥2.07b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.4b, being 113% of its EBIT. So we don't think WEILONG Delicious Global Holdings's use of debt is risky. 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. For example, we've discovered 1 warning sign for WEILONG Delicious Global Holdings that you should be aware of before investing here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.