Health Check: How Prudently Does Neway Group Holdings (HKG:55) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Neway Group Holdings Limited (HKG:55) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Neway Group Holdings

How Much Debt Does Neway Group Holdings Carry?

As you can see below, Neway Group Holdings had HK$88.8m of debt at June 2020, down from HK$92.7m a year prior. However, its balance sheet shows it holds HK$237.9m in cash, so it actually has HK$149.0m net cash.

How Strong Is Neway Group Holdings's Balance Sheet?

According to the last reported balance sheet, Neway Group Holdings had liabilities of HK$242.5m due within 12 months, and liabilities of HK$53.7m due beyond 12 months. On the other hand, it had cash of HK$237.9m and HK$210.9m worth of receivables due within a year. So it can boast HK$152.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Neway Group Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Neway Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Neway Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$529m, which is a fall of 7.6%. That's not what we would hope to see.

So How Risky Is Neway Group Holdings?

While Neway Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$18m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. 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 instance, we've identified 3 warning signs for Neway Group Holdings (1 is a bit concerning) you should be aware of.

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.

If you’re looking to trade Neway Group Holdings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.