Is NVC International Holdings (HKG:2222) Using Too Much Debt?

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 can see that NVC International Holdings Limited (HKG:2222) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NVC International Holdings

What Is NVC International Holdings's Net Debt?

As you can see below, at the end of June 2024, NVC International Holdings had US$5.75m of debt, up from US$3.76m a year ago. Click the image for more detail. But it also has US$121.8m in cash to offset that, meaning it has US$116.1m net cash.

A Look At NVC International Holdings' Liabilities

According to the last reported balance sheet, NVC International Holdings had liabilities of US$70.8m due within 12 months, and liabilities of US$10.4m due beyond 12 months. On the other hand, it had cash of US$121.8m and US$68.2m worth of receivables due within a year. So it can boast US$108.8m more liquid assets than total liabilities.

This luscious liquidity implies that NVC International Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that NVC International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Although NVC International Holdings made a loss at the EBIT level, last year, it was also good to see that it generated US$1.5m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NVC International Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While NVC International Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, NVC International Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case NVC International Holdings has US$116.1m in net cash and a strong balance sheet. The cherry on top was that in converted 1,364% of that EBIT to free cash flow, bringing in US$20m. So we don't think NVC International Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for NVC International Holdings that you should be aware of before investing here.

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.