Does National United Resources Holdings (HKG:254) Have A Healthy Balance Sheet?

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. We can see that National United Resources Holdings Limited (HKG:254) does use debt in its business. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is National United Resources Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 National United Resources Holdings had debt of HK$80.9m, up from HK$68.9m in one year. However, it does have HK$152.9m in cash offsetting this, leading to net cash of HK$72.1m.

How Strong Is National United Resources Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that National United Resources Holdings had liabilities of HK$470.6m due within 12 months and liabilities of HK$2.67m due beyond that. Offsetting these obligations, it had cash of HK$152.9m as well as receivables valued at HK$148.0m due within 12 months. So it has liabilities totalling HK$172.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$206.2m, so it does suggest shareholders should keep an eye on National United Resources Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, National United Resources Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for National United Resources Holdings

We also note that National United Resources Holdings improved its EBIT from a last year's loss to a positive HK$22m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since National United Resources 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While National United Resources Holdings 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, National United Resources Holdings 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

Although National United Resources Holdings'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$72.1m. Despite the cash, we do find National United Resources Holdings's conversion of EBIT to free cash flow concerning, so we're not particularly comfortable with the stock. 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. We've identified 3 warning signs with National United Resources Holdings (at least 1 which is significant) , and understanding them should be part of your investment process.

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.