Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Wellhope Foods Co., Ltd. (SHSE:603609) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Wellhope Foods's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2024 Wellhope Foods had debt of CN¥4.23b, up from CN¥4.03b in one year. However, it also had CN¥1.48b in cash, and so its net debt is CN¥2.75b.
A Look At Wellhope Foods' Liabilities
According to the last reported balance sheet, Wellhope Foods had liabilities of CN¥3.83b due within 12 months, and liabilities of CN¥3.55b due beyond 12 months. Offsetting this, it had CN¥1.48b in cash and CN¥1.56b in receivables that were due within 12 months. So it has liabilities totalling CN¥4.35b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CN¥6.83b, so it does suggest shareholders should keep an eye on Wellhope Foods' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wellhope Foods's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Wellhope Foods wasn't profitable at an EBIT level, but managed to grow its revenue by 3.1%, to CN¥35b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Wellhope Foods had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥258m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥579m into a profit. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Wellhope Foods's profit, revenue, and operating cashflow have changed over the last few years.
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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