New Asia Construction & Development (TWSE:2516) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, New Asia Construction & Development Corp. (TWSE:2516) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for New Asia Construction & Development

How Much Debt Does New Asia Construction & Development Carry?

As you can see below, New Asia Construction & Development had NT$972.5m of debt at September 2023, down from NT$1.31b a year prior. But it also has NT$976.1m in cash to offset that, meaning it has NT$3.57m net cash.

How Healthy Is New Asia Construction & Development's Balance Sheet?

The latest balance sheet data shows that New Asia Construction & Development had liabilities of NT$4.84b due within a year, and liabilities of NT$119.9m falling due after that. Offsetting these obligations, it had cash of NT$976.1m as well as receivables valued at NT$2.62b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.36b.

While this might seem like a lot, it is not so bad since New Asia Construction & Development has a market capitalization of NT$2.68b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, New Asia Construction & Development also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is New Asia Construction & Development's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year New Asia Construction & Development wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to NT$8.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is New Asia Construction & Development?

Although New Asia Construction & Development had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$371m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 3 warning signs for New Asia Construction & Development you should be aware of, and 1 of them is potentially serious.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.