Nanfang Communication Holdings (HKG:1617) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Nanfang Communication Holdings Limited (HKG:1617) 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. 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. 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.

View our latest analysis for Nanfang Communication Holdings

What Is Nanfang Communication Holdings's Debt?

The image below, which you can click on for greater detail, shows that Nanfang Communication Holdings had debt of CN¥447.8m at the end of June 2024, a reduction from CN¥500.2m over a year. However, it does have CN¥211.9m in cash offsetting this, leading to net debt of about CN¥235.9m.

How Healthy Is Nanfang Communication Holdings' Balance Sheet?

We can see from the most recent balance sheet that Nanfang Communication Holdings had liabilities of CN¥563.3m falling due within a year, and liabilities of CN¥103.7m due beyond that. On the other hand, it had cash of CN¥211.9m and CN¥413.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥42.1m.

While this might seem like a lot, it is not so bad since Nanfang Communication Holdings has a market capitalization of CN¥133.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nanfang Communication Holdings will need earnings to service that debt. 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.

In the last year Nanfang Communication Holdings had a loss before interest and tax, and actually shrunk its revenue by 8.8%, to CN¥514m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Nanfang Communication Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥6.4m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of CN¥841k and a profit of CN¥8.6m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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 example, we've discovered 4 warning signs for Nanfang Communication Holdings (1 is a bit unpleasant!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.