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. Importantly, New Universe Environmental Group Limited (HKG:436) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for New Universe Environmental Group
How Much Debt Does New Universe Environmental Group Carry?
You can click the graphic below for the historical numbers, but it shows that New Universe Environmental Group had HK$53.7m of debt in June 2024, down from HK$96.5m, one year before. But it also has HK$212.3m in cash to offset that, meaning it has HK$158.6m net cash.
How Healthy Is New Universe Environmental Group's Balance Sheet?
We can see from the most recent balance sheet that New Universe Environmental Group had liabilities of HK$252.8m falling due within a year, and liabilities of HK$38.6m due beyond that. On the other hand, it had cash of HK$212.3m and HK$98.8m worth of receivables due within a year. So it can boast HK$19.7m more liquid assets than total liabilities.
This surplus suggests that New Universe Environmental Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that New Universe Environmental Group has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that New Universe Environmental Group has boosted its EBIT by 93%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is New Universe Environmental Group'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. New Universe Environmental Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, New Universe Environmental Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that New Universe Environmental Group has net cash of HK$158.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$43m, being 227% of its EBIT. So is New Universe Environmental Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with New Universe Environmental Group (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.