Is China New Town Development (HKG:1278) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 China New Town Development Company Limited (HKG:1278) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China New Town Development

What Is China New Town Development's Debt?

As you can see below, China New Town Development had CN¥2.29b of debt at June 2024, down from CN¥2.60b a year prior. But on the other hand it also has CN¥3.11b in cash, leading to a CN¥820.4m net cash position.

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

The latest balance sheet data shows that China New Town Development had liabilities of CN¥936.5m due within a year, and liabilities of CN¥2.27b falling due after that. Offsetting these obligations, it had cash of CN¥3.11b as well as receivables valued at CN¥687.0m due within 12 months. So it actually has CN¥589.9m more liquid assets than total liabilities.

This luscious liquidity implies that China New Town Development's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, China New Town Development boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, China New Town Development turned things around in the last 12 months, delivering and EBIT of CN¥309m. When analysing debt levels, the balance sheet is the obvious place to start. But it is China New Town Development'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, while the tax-man may adore accounting profits, lenders only accept 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 year, China New Town Development recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case China New Town Development has CN¥820.4m in net cash and a decent-looking balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for China New Town Development 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.