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. Importantly, NWS Holdings Limited (HKG:659) does carry debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for NWS Holdings
What Is NWS Holdings's Net Debt?
As you can see below, NWS Holdings had HK$26.3b of debt at December 2020, down from HK$29.0b a year prior. However, it also had HK$22.3b in cash, and so its net debt is HK$4.02b.
How Strong Is NWS Holdings' Balance Sheet?
The latest balance sheet data shows that NWS Holdings had liabilities of HK$48.9b due within a year, and liabilities of HK$43.5b falling due after that. Offsetting this, it had HK$22.3b in cash and HK$15.8b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$54.4b.
The deficiency here weighs heavily on the HK$35.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, NWS Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NWS Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, NWS Holdings reported revenue of HK$29b, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months NWS Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost HK$454m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through HK$6.2b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that NWS Holdings is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. 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.
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About SEHK:659
CTF Services
An investment holding company, operates in the toll roads, construction, insurance, logistics, and facilities management businesses in Hong Kong, Mainland China, and internationally.
Good value with acceptable track record.