Does New Concepts Holdings (HKG:2221) 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.' 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 Concepts Holdings Limited (HKG:2221) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 Concepts Holdings

What Is New Concepts Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that New Concepts Holdings had HK$276.5m of debt in September 2021, down from HK$534.7m, one year before. However, because it has a cash reserve of HK$81.0m, its net debt is less, at about HK$195.5m.

How Healthy Is New Concepts Holdings' Balance Sheet?

We can see from the most recent balance sheet that New Concepts Holdings had liabilities of HK$304.4m falling due within a year, and liabilities of HK$196.7m due beyond that. On the other hand, it had cash of HK$81.0m and HK$141.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$278.8m.

While this might seem like a lot, it is not so bad since New Concepts Holdings has a market capitalization of HK$685.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since New Concepts 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.

Over 12 months, New Concepts Holdings made a loss at the EBIT level, and saw its revenue drop to HK$560m, which is a fall of 29%. To be frank that doesn't bode well.

Caveat Emptor

Not only did New Concepts Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$87m. 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. We would feel better if it turned its trailing twelve month loss of HK$67m into a profit. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for New Concepts Holdings (of which 1 is potentially serious!) you should know about.

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.