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Is Want Want China Holdings (HKG:151) Using Too Much Debt?

Simply Wall St

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 Want Want China Holdings Limited (HKG:151) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Want Want China Holdings

What Is Want Want China Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2019 Want Want China Holdings had CN¥9.51b of debt, an increase on CN¥6.90b, over one year. However, it does have CN¥17.2b in cash offsetting this, leading to net cash of CN¥7.66b.

SEHK:151 Historical Debt, August 15th 2019

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¥6.30b falling due within a year, and liabilities of CN¥8.11b due beyond that. On the other hand, it had cash of CN¥17.2b and CN¥1.24b worth of receivables due within a year. So it can boast CN¥4.01b 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!

And we also note warmly that Want Want China Holdings grew its EBIT by 12% last year, making its debt load easier to handle. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Want Want China 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, Want Want China Holdings recorded free cash flow worth a fulsome 93% 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¥7.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥4.0b, being 93% of its EBIT. So we don't think Want Want China Holdings's use of debt is risky. Another factor that would give us confidence in Want Want China Holdings would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.