These 4 Measures Indicate That NagaCorp (HKG:3918) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, NagaCorp Ltd. (HKG:3918) does carry debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is NagaCorp's Debt?

The image below, which you can click on for greater detail, shows that NagaCorp had debt of US$70.0m at the end of June 2025, a reduction from US$542.1m over a year. But on the other hand it also has US$251.6m in cash, leading to a US$181.6m net cash position.

How Strong Is NagaCorp's Balance Sheet?

According to the last reported balance sheet, NagaCorp had liabilities of US$226.7m due within 12 months, and liabilities of US$52.7m due beyond 12 months. On the other hand, it had cash of US$251.6m and US$11.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$16.4m.

Having regard to NagaCorp's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$3.21b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, NagaCorp boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for NagaCorp

On top of that, NagaCorp grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NagaCorp's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. NagaCorp 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, NagaCorp 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 look at a company's total liabilities, it is very reassuring that NagaCorp has US$181.6m in net cash. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in US$174m. So we don't think NagaCorp's use of debt is risky. 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 1 warning sign with NagaCorp , and understanding them should be part of your investment process.

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.

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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.