Health Check: How Prudently Does New Century Group Hong Kong (HKG:234) Use Debt?

Warren Buffett famously said, '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 New Century Group Hong Kong Limited (HKG:234) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for New Century Group Hong Kong

What Is New Century Group Hong Kong's Net Debt?

As you can see below, New Century Group Hong Kong had HK$111.8m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$401.5m in cash offsetting this, leading to net cash of HK$289.7m.

How Strong Is New Century Group Hong Kong's Balance Sheet?

We can see from the most recent balance sheet that New Century Group Hong Kong had liabilities of HK$134.2m falling due within a year, and liabilities of HK$19.1m due beyond that. Offsetting this, it had HK$401.5m in cash and HK$514.7m in receivables that were due within 12 months. So it can boast HK$763.0m more liquid assets than total liabilities.

This surplus strongly suggests that New Century Group Hong Kong has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, New Century Group Hong Kong 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 New Century Group Hong Kong'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, New Century Group Hong Kong made a loss at the EBIT level, and saw its revenue drop to HK$81m, which is a fall of 20%. We would much prefer see growth.

So How Risky Is New Century Group Hong Kong?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that New Century Group Hong Kong had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$40m of cash and made a loss of HK$1.5m. Given it only has net cash of HK$289.7m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 3 warning signs with New Century Group Hong Kong (at least 2 which are significant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.