These 4 Measures Indicate That NNK Group (HKG:3773) Is Using Debt Reasonably Well

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.' 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 NNK Group Limited (HKG:3773) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. 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.

Check out our latest analysis for NNK Group

What Is NNK Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 NNK Group had CN¥50.0m of debt, an increase on CN¥20.0m, over one year. However, its balance sheet shows it holds CN¥103.6m in cash, so it actually has CN¥53.6m net cash.

A Look At NNK Group's Liabilities

The latest balance sheet data shows that NNK Group had liabilities of CN¥133.9m due within a year, and liabilities of CN¥9.90m falling due after that. Offsetting this, it had CN¥103.6m in cash and CN¥193.2m in receivables that were due within 12 months. So it actually has CN¥153.0m more liquid assets than total liabilities.

This luscious liquidity implies that NNK Group'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, NNK Group 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, NNK Group turned things around in the last 12 months, delivering and EBIT of CN¥24m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is NNK Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While NNK Group 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 year, NNK Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case NNK Group has CN¥53.6m in net cash and a strong balance sheet. So we are not troubled with NNK Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for NNK Group (2 can't be ignored) you should be aware of.

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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