Does NewOcean Energy Holdings (HKG:342) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that NewOcean Energy Holdings Limited (HKG:342) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NewOcean Energy Holdings

What Is NewOcean Energy Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that NewOcean Energy Holdings had debt of HK$6.62b at the end of December 2020, a reduction from HK$7.06b over a year. However, because it has a cash reserve of HK$873.7m, its net debt is less, at about HK$5.75b.

A Look At NewOcean Energy Holdings' Liabilities

We can see from the most recent balance sheet that NewOcean Energy Holdings had liabilities of HK$7.27b falling due within a year, and liabilities of HK$93.3m due beyond that. Offsetting this, it had HK$873.7m in cash and HK$6.09b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$406.5m.

This deficit isn't so bad because NewOcean Energy Holdings is worth HK$880.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is NewOcean Energy 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.

In the last year NewOcean Energy Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to HK$19b. That makes us nervous, to say the least.

Caveat Emptor

Not only did NewOcean Energy Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$1.1b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$2.2b. So to be blunt we do think it 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. Be aware that NewOcean Energy Holdings is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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