Is Newton Resources (HKG:1231) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Newton Resources Ltd (HKG:1231) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Newton Resources

What Is Newton Resources's Debt?

As you can see below, Newton Resources had US$5.12m of debt at December 2021, down from US$20.3m a year prior. However, its balance sheet shows it holds US$14.5m in cash, so it actually has US$9.38m net cash.

How Healthy Is Newton Resources' Balance Sheet?

According to the last reported balance sheet, Newton Resources had liabilities of US$7.36m due within 12 months, and liabilities of US$158.0k due beyond 12 months. On the other hand, it had cash of US$14.5m and US$1.37m worth of receivables due within a year. So it actually has US$8.36m more liquid assets than total liabilities.

This short term liquidity is a sign that Newton Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Newton Resources has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Newton Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Newton Resources made a loss at the EBIT level, and saw its revenue drop to US$293m, which is a fall of 37%. That makes us nervous, to say the least.

So How Risky Is Newton Resources?

While Newton Resources lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$16m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Newton Resources you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.