Does NOVA Group Holdings (HKG:1360) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that NOVA Group Holdings Limited (HKG:1360) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NOVA Group Holdings

What Is NOVA Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that NOVA Group Holdings had HK$40.5m of debt in June 2022, down from HK$66.8m, one year before. But on the other hand it also has HK$72.9m in cash, leading to a HK$32.4m net cash position.

How Strong Is NOVA Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that NOVA Group Holdings had liabilities of HK$56.5m falling due within a year, and liabilities of HK$1.16m due beyond that. Offsetting these obligations, it had cash of HK$72.9m as well as receivables valued at HK$481.1m due within 12 months. So it actually has HK$496.4m more liquid assets than total liabilities.

This surplus liquidity suggests that NOVA Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, NOVA Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is NOVA Group 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.

Over 12 months, NOVA Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$112m, which is a fall of 51%. To be frank that doesn't bode well.

So How Risky Is NOVA Group Holdings?

While NOVA Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$92m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. For example NOVA Group Holdings has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.