Here's Why China Overseas Nuoxin International Holdings (HKG:464) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies China Overseas Nuoxin International Holdings Limited (HKG:464) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Overseas Nuoxin International Holdings

What Is China Overseas Nuoxin International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that China Overseas Nuoxin International Holdings had debt of HK$88.9m at the end of March 2021, a reduction from HK$105.5m over a year. However, it also had HK$46.1m in cash, and so its net debt is HK$42.8m.

A Look At China Overseas Nuoxin International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that China Overseas Nuoxin International Holdings had liabilities of HK$188.7m due within 12 months and liabilities of HK$16.8m due beyond that. Offsetting these obligations, it had cash of HK$46.1m as well as receivables valued at HK$74.8m due within 12 months. So it has liabilities totalling HK$84.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because China Overseas Nuoxin International Holdings is worth HK$267.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Overseas Nuoxin International 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, China Overseas Nuoxin International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$366m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did China Overseas Nuoxin International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$15m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of HK$24m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for China Overseas Nuoxin International Holdings (of which 1 shouldn't be ignored!) 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.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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 (at) simplywallst.com.