Is Newlink Technology (HKG:9600) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Newlink Technology Inc. (HKG:9600) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Newlink Technology

What Is Newlink Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Newlink Technology had CN¥20.0m of debt, an increase on none, over one year. But it also has CN¥331.3m in cash to offset that, meaning it has CN¥311.3m net cash.

A Look At Newlink Technology's Liabilities

The latest balance sheet data shows that Newlink Technology had liabilities of CN¥129.6m due within a year, and liabilities of CN¥45.4m falling due after that. Offsetting this, it had CN¥331.3m in cash and CN¥358.7m in receivables that were due within 12 months. So it actually has CN¥514.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Newlink Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Newlink Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Newlink Technology 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.

In the last year Newlink Technology had a loss before interest and tax, and actually shrunk its revenue by 4.6%, to CN¥250m. That's not what we would hope to see.

So How Risky Is Newlink Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Newlink Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥7.5m and booked a CN¥98m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥311.3m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example Newlink Technology has 4 warning signs (and 2 which are a bit unpleasant) we think 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.