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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. 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. Importantly, Wecon Holdings Limited (HKG:1793) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Wecon Holdings
What Is Wecon Holdings's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Wecon Holdings had debt of HK$10.0m, up from HK$8.50m in one year. However, its balance sheet shows it holds HK$174.3m in cash, so it actually has HK$164.3m net cash.
A Look At Wecon Holdings's Liabilities
The latest balance sheet data shows that Wecon Holdings had liabilities of HK$261.2m due within a year, and liabilities of HK$1.23m falling due after that. Offsetting this, it had HK$174.3m in cash and HK$246.0m in receivables that were due within 12 months. So it can boast HK$157.9m more liquid assets than total liabilities.
This luscious liquidity implies that Wecon 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, Wecon Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that Wecon Holdings saw its EBIT decline by 4.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wecon Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.