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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that New Focus Auto Tech Holdings Limited (HKG:360) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for New Focus Auto Tech Holdings
How Much Debt Does New Focus Auto Tech Holdings Carry?
The image below, which you can click on for greater detail, shows that at June 2019 New Focus Auto Tech Holdings had debt of CN¥605.6m, up from CN¥378.0m in one year. But it also has CN¥656.3m in cash to offset that, meaning it has CN¥50.7m net cash.
How Strong Is New Focus Auto Tech Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that New Focus Auto Tech Holdings had liabilities of CN¥1.36b due within 12 months and liabilities of CN¥127.3m due beyond that. Offsetting this, it had CN¥656.3m in cash and CN¥821.9m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
This state of affairs indicates that New Focus Auto Tech Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥575.7m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, New Focus Auto Tech Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since New Focus Auto Tech 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.