New Sparkle Roll International Group (HKG:970) Seems To Use Debt Quite Sensibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, New Sparkle Roll International Group Limited (HKG:970) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 New Sparkle Roll International Group

How Much Debt Does New Sparkle Roll International Group Carry?

The image below, which you can click on for greater detail, shows that at September 2021 New Sparkle Roll International Group had debt of HK$620.1m, up from HK$473.6m in one year. However, its balance sheet shows it holds HK$625.0m in cash, so it actually has HK$4.87m net cash.

A Look At New Sparkle Roll International Group's Liabilities

According to the last reported balance sheet, New Sparkle Roll International Group had liabilities of HK$1.11b due within 12 months, and liabilities of HK$425.5m due beyond 12 months. On the other hand, it had cash of HK$625.0m and HK$112.2m worth of receivables due within a year. So it has liabilities totalling HK$796.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of HK$1.02b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, New Sparkle Roll International Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, New Sparkle Roll International Group grew its EBIT by 93% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is New Sparkle Roll International Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. New Sparkle Roll International Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, New Sparkle Roll International Group's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although New Sparkle Roll International Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$4.87m. And it impressed us with its EBIT growth of 93% over the last year. So we don't have any problem with New Sparkle Roll International Group'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. For instance, we've identified 3 warning signs for New Sparkle Roll International Group (2 shouldn't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.