Nimble Holdings (HKG:186) Has A Pretty 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 can see that Nimble Holdings Company Limited (HKG:186) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nimble Holdings

What Is Nimble Holdings's Net Debt?

As you can see below, Nimble Holdings had HK$846.0m of debt at September 2024, down from HK$1.51b a year prior. However, it does have HK$912.0m in cash offsetting this, leading to net cash of HK$66.0m.

How Strong Is Nimble Holdings' Balance Sheet?

We can see from the most recent balance sheet that Nimble Holdings had liabilities of HK$2.60b falling due within a year, and liabilities of HK$4.00m due beyond that. Offsetting these obligations, it had cash of HK$912.0m as well as receivables valued at HK$39.0m due within 12 months. So its liabilities total HK$1.66b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of HK$1.27b, we think shareholders really should watch Nimble Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Nimble Holdings has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

It was also good to see that despite losing money on the EBIT line last year, Nimble Holdings turned things around in the last 12 months, delivering and EBIT of HK$118m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Nimble Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Nimble 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, Nimble 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 Nimble Holdings does have more liabilities than liquid assets, it also has net cash of HK$66.0m. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in HK$127m. So we don't have any problem with Nimble Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Nimble Holdings is showing 1 warning sign in our investment analysis , 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.