In This Article:
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.' 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, Nanfang Communication Holdings Limited (HKG:1617) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Nanfang Communication Holdings
What Is Nanfang Communication Holdings's Net Debt?
As you can see below, at the end of December 2018, Nanfang Communication Holdings had CN¥323.0m of debt, up from CN¥181.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥403.3m in cash, leading to a CN¥80.3m net cash position.
A Look At Nanfang Communication Holdings's Liabilities
The latest balance sheet data shows that Nanfang Communication Holdings had liabilities of CN¥626.3m due within a year, and liabilities of CN¥18.7m falling due after that. On the other hand, it had cash of CN¥403.3m and CN¥602.4m worth of receivables due within a year. So it actually has CN¥360.6m more liquid assets than total liabilities.
This surplus suggests that Nanfang Communication Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanfang Communication Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Nanfang Communication Holdings grew its EBIT by 4.6% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nanfang Communication Holdings's earnings that will influence how the balance sheet holds up in the future. 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.