NOVA Group Holdings (HKG:1360) Has A Rock Solid Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that NOVA Group Holdings Limited (HKG:1360) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NOVA Group Holdings

What Is NOVA Group Holdings's 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 December 2021, down from HK$171.5m, one year before. However, its balance sheet shows it holds HK$91.6m in cash, so it actually has HK$51.1m net cash.

How Strong Is NOVA Group Holdings' Balance Sheet?

The latest balance sheet data shows that NOVA Group Holdings had liabilities of HK$61.2m due within a year, and liabilities of HK$3.81m falling due after that. Offsetting these obligations, it had cash of HK$91.6m as well as receivables valued at HK$459.3m due within 12 months. So it actually has HK$485.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that NOVA Group Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that NOVA Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, NOVA Group Holdings grew its EBIT by 111% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While NOVA Group 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. During the last three years, NOVA Group Holdings produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case NOVA Group Holdings has HK$51.1m in net cash and a strong balance sheet. And we liked the look of last year's 111% year-on-year EBIT growth. When it comes to NOVA Group Holdings's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - NOVA Group Holdings has 3 warning signs we think you should be aware of.

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.