Does China New Town Development (HKG:1278) Have A Healthy 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 can see that China New Town Development Company Limited (HKG:1278) does use debt in its business. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does China New Town Development Carry?

As you can see below, China New Town Development had CN¥2.26b of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥4.27b in cash, so it actually has CN¥2.01b net cash.

How Strong Is China New Town Development's Balance Sheet?

According to the last reported balance sheet, China New Town Development had liabilities of CN¥2.26b due within 12 months, and liabilities of CN¥857.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.27b as well as receivables valued at CN¥652.1m due within 12 months. So it can boast CN¥1.80b more liquid assets than total liabilities.

This excess liquidity is a great indication that China New Town Development's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that China New Town Development has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for China New Town Development

Shareholders should be aware that China New Town Development's EBIT was down 22% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China New Town Development 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While China New Town Development 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. Over the last three years, China New Town Development saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that China New Town Development has net cash of CN¥2.01b and plenty of liquid assets. So we are not troubled with China New Town Development's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with China New Town Development (at least 1 which is significant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.