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.' 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 Wise Ally International Holdings Limited (HKG:9918) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Wise Ally International Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that Wise Ally International Holdings had HK$188.3m of debt in December 2024, down from HK$292.6m, one year before. However, its balance sheet shows it holds HK$305.1m in cash, so it actually has HK$116.9m net cash.
A Look At Wise Ally International Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that Wise Ally International Holdings had liabilities of HK$661.4m due within 12 months and liabilities of HK$51.0m due beyond that. On the other hand, it had cash of HK$305.1m and HK$271.0m worth of receivables due within a year. So its liabilities total HK$136.3m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of HK$154.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Wise Ally International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
Check out our latest analysis for Wise Ally International Holdings
Better yet, Wise Ally International Holdings grew its EBIT by 104% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wise Ally International 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Wise Ally International 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, Wise Ally International 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
Although Wise Ally International Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$116.9m. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in HK$120m. So we are not troubled with Wise Ally International Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Wise Ally International Holdings (1 is a bit concerning) you should be aware of.
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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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.