Does Neway Group Holdings (HKG:55) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Neway Group Holdings Limited (HKG:55) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Neway Group Holdings

What Is Neway Group Holdings's Debt?

As you can see below, Neway Group Holdings had HK$102.2m of debt at June 2023, down from HK$120.1m a year prior. But it also has HK$175.5m in cash to offset that, meaning it has HK$73.3m net cash.

A Look At Neway Group Holdings' Liabilities

According to the last reported balance sheet, Neway Group Holdings had liabilities of HK$371.2m due within 12 months, and liabilities of HK$63.2m due beyond 12 months. On the other hand, it had cash of HK$175.5m and HK$175.1m worth of receivables due within a year. So its liabilities total HK$83.8m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's HK$69.7m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Neway Group 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. There's no doubt that we learn most about debt from the balance sheet. But it is Neway Group Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Neway Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 28%, to HK$405m. That makes us nervous, to say the least.

So How Risky Is Neway Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Neway Group Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$28m and booked a HK$97m accounting loss. With only HK$73.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Neway Group Holdings you should know about.

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. 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.