Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Meituan (HKG:3690) uses debt in his business. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for Meituan
What is Meituan’s debt?
As you can see below, at the end of December 2021, Meituan had a debt of 54.2 billion Canadian yen, compared to 21.4 billion Canadian yen a year ago. Click on the image for more details. But on the other hand, he also has 116.8 billion yen in cash, resulting in a net cash position of 62.6 billion yen.
A look at Meituan’s responsibilities
According to the latest published balance sheet, Meituan had liabilities of 68.6 billion Canadian yen due within 12 months and liabilities of 46.5 billion domestic yen due beyond 12 months. In return, he had 116.8 billion yen in cash and 10.3 billion yen in debt due within 12 months. It can therefore boast that it has 12.0 billion yen more in liquid assets than total Passives.
Considering Meituan’s size, it looks like its cash is well balanced against its total liabilities. So while it’s hard to imagine the 822.9 billion yen CN company fighting for the money, we still think it’s worth watching its balance sheet. In short, Meituan has clean cash, so it’s fair to say that she doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Meituan can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Year-over-year, Meituan posted revenue of C$179 billion, a 56% gain, although it reported no earnings before interest and taxes. With a little luck, the company will be able to progress towards profitability.
So how risky is Meituan?
Statistically speaking, businesses that lose money are riskier than those that make money. And we note that Meituan posted a loss in earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of 13 billion yen and recorded a book loss of 24 billion yen. Given that it only has net cash of 62.6 billion Canadian yen, the company may need to raise more capital if it does not break even soon. Meituan’s revenue growth has shone in the past year, so he may well be able to turn a profit in due course. By investing before these profits, shareholders take on more risk in the hope of greater rewards. 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. For example, we found 1 warning sign for Meituan which you should be aware of before investing here.
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% freeright now.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.