New Century Group Hong Kong (HKG:234) Seems To Use Debt Quite Sensibly

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 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, New Century Group Hong Kong Limited (HKG:234) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for New Century Group Hong Kong

What Is New Century Group Hong Kong's Debt?

As you can see below, New Century Group Hong Kong had HK$104.1m of debt at March 2024, down from HK$151.8m a year prior. But on the other hand it also has HK$518.3m in cash, leading to a HK$414.2m net cash position.

A Look At New Century Group Hong Kong's Liabilities

The latest balance sheet data shows that New Century Group Hong Kong had liabilities of HK$114.8m due within a year, and liabilities of HK$19.5m falling due after that. On the other hand, it had cash of HK$518.3m and HK$656.4m worth of receivables due within a year. So it actually has HK$1.04b more liquid assets than total liabilities.

This excess liquidity is a great indication that New Century Group Hong Kong's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that New Century Group Hong Kong has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact New Century Group Hong Kong's saving grace is its low debt levels, because its EBIT has tanked 88% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, New Century Group Hong Kong saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that New Century Group Hong Kong has net cash of HK$414.2m and plenty of liquid assets. So we are not troubled with New Century Group Hong Kong's debt use. 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. For example - New Century Group Hong Kong has 3 warning signs we think you should be aware of.

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. 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.

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