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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies China Overseas Nuoxin International Holdings Limited (HKG:464) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for China Overseas Nuoxin International Holdings
What Is China Overseas Nuoxin International Holdings's Net Debt?
As you can see below, at the end of March 2019, China Overseas Nuoxin International Holdings had HK$124.9m of debt, up from HK$61.7m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$102.7m, its net debt is less, at about HK$22.2m.
A Look At China Overseas Nuoxin International Holdings's Liabilities
According to the last reported balance sheet, China Overseas Nuoxin International Holdings had liabilities of HK$237.3m due within 12 months, and liabilities of HK$15.3m due beyond 12 months. Offsetting these obligations, it had cash of HK$102.7m as well as receivables valued at HK$101.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$48.7m.
Given China Overseas Nuoxin International Holdings has a market capitalization of HK$846.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Overseas Nuoxin International Holdings'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.