New Century Group Hong Kong (HKG:234) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that New Century Group Hong Kong Limited (HKG:234) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for New Century Group Hong Kong

How Much Debt Does New Century Group Hong Kong Carry?

As you can see below, New Century Group Hong Kong had HK$111.8m of debt at September 2020, down from HK$131.8m a year prior. However, it does have HK$412.1m in cash offsetting this, leading to net cash of HK$300.3m.

A Look At New Century Group Hong Kong's Liabilities

We can see from the most recent balance sheet that New Century Group Hong Kong had liabilities of HK$156.1m falling due within a year, and liabilities of HK$22.3m due beyond that. Offsetting this, it had HK$412.1m in cash and HK$618.5m in receivables that were due within 12 months. So it can boast HK$852.3m 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). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, New Century Group Hong Kong boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for New Century Group Hong Kong if management cannot prevent a repeat of the 75% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since New Century Group Hong Kong will need earnings to service that debt. 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. New Century Group Hong Kong may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, New Century Group Hong Kong actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case New Century Group Hong Kong has HK$300.3m in net cash and a strong balance sheet. And it impressed us with free cash flow of -HK$90m, being 219% of its EBIT. So we don't think New Century Group Hong Kong's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with New Century Group Hong Kong (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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