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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Wai Yuen Tong Medicine Holdings Limited (HKG:897) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Wai Yuen Tong Medicine Holdings
What Is Wai Yuen Tong Medicine Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Wai Yuen Tong Medicine Holdings had HK$852.2m of debt in March 2019, down from HK$927.0m, one year before. But on the other hand it also has HK$903.3m in cash, leading to a HK$51.1m net cash position.
How Healthy Is Wai Yuen Tong Medicine Holdings's Balance Sheet?
The latest balance sheet data shows that Wai Yuen Tong Medicine Holdings had liabilities of HK$381.3m due within a year, and liabilities of HK$625.2m falling due after that. Offsetting these obligations, it had cash of HK$903.3m as well as receivables valued at HK$132.2m due within 12 months. So it can boast HK$28.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Wai Yuen Tong Medicine Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Wai Yuen Tong Medicine Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Wai Yuen Tong Medicine Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Wai Yuen Tong Medicine Holdings actually shrunk its revenue by 11%, to HK$751m. We would much prefer see growth.