Stock Analysis

Does Niche-Tech Group (HKG:8490) Have A Healthy Balance Sheet?

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Warren Buffett famously said, '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 Niche-Tech Group Limited (HKG:8490) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Niche-Tech Group

What Is Niche-Tech Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Niche-Tech Group had HK$40.3m of debt, an increase on HK$26.3m, over one year. However, its balance sheet shows it holds HK$52.2m in cash, so it actually has HK$12.0m net cash.

SEHK:8490 Debt to Equity History September 8th 2021

How Healthy Is Niche-Tech Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Niche-Tech Group had liabilities of HK$66.0m due within 12 months and liabilities of HK$20.4m due beyond that. On the other hand, it had cash of HK$52.2m and HK$108.7m worth of receivables due within a year. So it can boast HK$74.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Niche-Tech Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Niche-Tech Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Niche-Tech Group 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.

Over 12 months, Niche-Tech Group reported revenue of HK$225m, which is a gain of 25%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Niche-Tech Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Niche-Tech Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$67m of cash and made a loss of HK$7.2m. With only HK$12.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Niche-Tech Group's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Niche-Tech Group (2 are concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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