Does NWS Holdings (HKG:659) Have A Healthy Balance Sheet?

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. As with many other companies NWS Holdings Limited (HKG:659) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NWS Holdings

How Much Debt Does NWS Holdings Carry?

As you can see below, at the end of December 2022, NWS Holdings had HK$23.4b of debt, up from HK$20.1b a year ago. Click the image for more detail. But it also has HK$31.1b in cash to offset that, meaning it has HK$7.76b net cash.

A Look At NWS Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that NWS Holdings had liabilities of HK$62.0b due within 12 months and liabilities of HK$36.5b due beyond that. Offsetting this, it had HK$31.1b in cash and HK$9.59b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$57.8b.

This deficit casts a shadow over the HK$25.3b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, NWS Holdings would likely require a major re-capitalisation if it had to pay its creditors today. NWS Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

It was also good to see that despite losing money on the EBIT line last year, NWS Holdings turned things around in the last 12 months, delivering and EBIT of HK$2.9b. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if NWS Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. NWS Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, NWS Holdings produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although NWS Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$7.76b. And it impressed us with free cash flow of HK$2.2b, being 75% of its EBIT. So while NWS Holdings does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should learn about the 3 warning signs we've spotted with NWS Holdings (including 1 which doesn't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.