NWS Holdings (HKG:659) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, NWS Holdings Limited (HKG:659) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for NWS Holdings

How Much Debt Does NWS Holdings Carry?

The image below, which you can click on for greater detail, shows that NWS Holdings had debt of HK$20.1b at the end of December 2021, a reduction from HK$25.4b over a year. However, its balance sheet shows it holds HK$28.2b in cash, so it actually has HK$8.05b net cash.

How Strong Is NWS Holdings' Balance Sheet?

According to the last reported balance sheet, NWS Holdings had liabilities of HK$51.5b due within 12 months, and liabilities of HK$40.9b due beyond 12 months. Offsetting this, it had HK$28.2b in cash and HK$8.78b in receivables that were due within 12 months. So its liabilities total HK$55.5b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$27.4b 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. After all, NWS Holdings would likely require a major re-capitalisation if it had to pay its creditors today. Given that NWS Holdings has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year NWS Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to HK$30b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is NWS Holdings?

Although NWS Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$1.9b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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. For example NWS Holdings has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.