Wise Ally International Holdings (HKG:9918) has a fairly healthy balance sheet
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Wise Ally International Holdings Limited (HKG:9918) uses debt in his business. But does this debt worry shareholders?
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Wise Ally International Holdings
What is the net debt of Wise Ally International Holdings?
As you can see below, Wise Ally International Holdings had a debt of HK$244.9 million, as of June 2022, which is about the same as the previous year. You can click on the graph for more details. However, since it has a cash reserve of HK$209.5 million, its net debt is lower at around HK$35.4 million.
How healthy is Wise Ally International Holdings’ balance sheet?
We can see from the most recent balance sheet that Wise Ally International Holdings had liabilities of HK$793.1 million due in one year, and liabilities of HK$38.5 million due beyond. On the other hand, it had cash of HK$209.5 million and HK$306.5 million of receivables due within one year. Thus, its liabilities total HK$315.6 million more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the HK$112.0 million company, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Wise Ally International Holdings would likely need a major recapitalization if its creditors were to demand repayment.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.
Wise Ally International Holdings has net debt of just 0.48 times EBITDA, indicating that it is certainly not an imprudent borrower. And it has 7.1x interest coverage, which is more than enough. And we also warmly note that Wise Ally International Holdings increased its EBIT by 17% last year, making its leverage more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Wise Ally International Holdings will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, Wise Ally International Holdings has actually produced more free cash flow than EBIT for the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
The level of total liabilities of Wise Ally International Holdings was really negative in this analysis, even though the other factors we considered were considerably better. There’s no doubt that its ability to convert EBIT to free cash flow is pretty dazzling. Looking at all this data, we feel a bit cautious about Wise Ally International Holdings’ debt levels. While we understand that debt can improve return on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Be aware that Wise Ally International Holdings displays 4 warning signs in our investment analysis and 1 of them is significant…
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.