These 4 Measures Indicate That New Universe Environmental Group (HKG:436) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that New Universe Environmental Group Limited (HKG:436) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for New Universe Environmental Group

How Much Debt Does New Universe Environmental Group Carry?

As you can see below, New Universe Environmental Group had HK$214.0m of debt at December 2020, down from HK$265.4m a year prior. But it also has HK$257.5m in cash to offset that, meaning it has HK$43.5m net cash.

How Healthy Is New Universe Environmental Group's Balance Sheet?

We can see from the most recent balance sheet that New Universe Environmental Group had liabilities of HK$529.2m falling due within a year, and liabilities of HK$53.0m due beyond that. On the other hand, it had cash of HK$257.5m and HK$131.0m worth of receivables due within a year. So it has liabilities totalling HK$193.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since New Universe Environmental Group has a market capitalization of HK$925.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, New Universe Environmental Group boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that New Universe Environmental Group grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is New Universe Environmental Group's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While New Universe Environmental Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, New Universe Environmental Group's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although New Universe Environmental Group'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$43.5m. On top of that, it increased its EBIT by 15% in the last twelve months. So we are not troubled with New Universe Environmental Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - New Universe Environmental Group has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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