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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that New Focus Auto Tech Holdings Limited (HKG:360) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for New Focus Auto Tech Holdings

What Is New Focus Auto Tech Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 New Focus Auto Tech Holdings had debt of CN¥381.7m, up from CN¥339.0m in one year. However, it does have CN¥672.3m in cash offsetting this, leading to net cash of CN¥290.5m.

A Look At New Focus Auto Tech Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that New Focus Auto Tech Holdings had liabilities of CN¥744.1m due within 12 months and liabilities of CN¥124.6m due beyond that. On the other hand, it had cash of CN¥672.3m and CN¥91.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥104.9m.

New Focus Auto Tech Holdings has a market capitalization of CN¥454.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, New Focus Auto Tech Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 33%, to CN¥598m. To be frank that doesn't bode well.

So How Risky Is New Focus Auto Tech Holdings?

While New Focus Auto Tech Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥40m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for New Focus Auto Tech Holdings (2 can't be ignored!) that you should be aware of before investing here.

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. 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.