Would New Focus Auto Tech Holdings (HKG:360) Be Better Off With Less Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, New Focus Auto Tech Holdings Limited (HKG:360) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for New Focus Auto Tech Holdings

What Is New Focus Auto Tech Holdings's Debt?

The chart below, which you can click on for greater detail, shows that New Focus Auto Tech Holdings had CN¥304.1m in debt in December 2023; about the same as the year before. However, it also had CN¥138.9m in cash, and so its net debt is CN¥165.2m.

How Strong Is New Focus Auto Tech Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that New Focus Auto Tech Holdings had liabilities of CN¥680.2m due within 12 months and liabilities of CN¥89.5m due beyond that. Offsetting this, it had CN¥138.9m in cash and CN¥457.3m in receivables that were due within 12 months. So its liabilities total CN¥173.5m more than the combination of its cash and short-term receivables.

Since publicly traded New Focus Auto Tech Holdings shares are worth a total of CN¥2.28b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is New Focus Auto Tech Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, New Focus Auto Tech Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥555m, which is a fall of 6.1%. We would much prefer see growth.

Caveat Emptor

Importantly, New Focus Auto Tech Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥77m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥56m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting New Focus Auto Tech Holdings insider transactions.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.