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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Wasion Holdings Limited (HKG:3393) does have debt on its balance sheet. 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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Wasion Holdings's Net Debt?
As you can see below, at the end of December 2018, Wasion Holdings had CN¥1.42b of debt, up from CN¥908.9m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.43b in cash, leading to a CN¥14.1m net cash position.
How Strong Is Wasion Holdings's Balance Sheet?
The latest balance sheet data shows that Wasion Holdings had liabilities of CN¥3.50b due within a year, and liabilities of CN¥367.0m falling due after that. On the other hand, it had cash of CN¥1.43b and CN¥3.44b worth of receivables due within a year. So it can boast CN¥1.01b more liquid assets than total liabilities.
This luscious liquidity implies that Wasion Holdings's balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Succinctly put, Wasion Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Wasion Holdings grew its EBIT by 64% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Wasion 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. Wasion 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. In the last three years, Wasion Holdings created free cash flow amounting to 13% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
While we empathize with investors who find debt concerning, you should keep in mind that Wasion Holdings has net cash of CN¥14m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 64% over the last year. So we don't think Wasion Holdings's use of debt is risky. We'd be very excited to see if Wasion Holdings insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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