Does New Focus Auto Tech Holdings (HKG:360) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that New Focus Auto Tech Holdings Limited (HKG:360) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for New Focus Auto Tech Holdings

How Much Debt Does New Focus Auto Tech Holdings Carry?

The image below, which you can click on for greater detail, shows that New Focus Auto Tech Holdings had debt of CN¥369.9m at the end of June 2020, a reduction from CN¥605.6m over a year. However, its balance sheet shows it holds CN¥752.6m in cash, so it actually has CN¥382.7m net cash.

A Look At New Focus Auto Tech Holdings's Liabilities

According to the last reported balance sheet, New Focus Auto Tech Holdings had liabilities of CN¥820.8m due within 12 months, and liabilities of CN¥167.8m due beyond 12 months. Offsetting this, it had CN¥752.6m in cash and CN¥139.6m in receivables that were due within 12 months. So its liabilities total CN¥96.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since New Focus Auto Tech Holdings has a market capitalization of CN¥412.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, New Focus Auto Tech Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since New Focus Auto Tech Holdings will need earnings to service that debt. 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.

In the last year New Focus Auto Tech Holdings had a loss before interest and tax, and actually shrunk its revenue by 44%, to CN¥1.1b. To be frank that doesn't bode well.

So How Risky Is New Focus Auto Tech Holdings?

Although New Focus Auto Tech Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥45m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for New Focus Auto Tech Holdings (of which 1 makes us a bit uncomfortable!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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