Here’s why Nanfang Communication Holdings (HKG: 1617) can afford to go into debt
Legendary fund manager Li Lu (who Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We note that Nanfang Communication Holdings Limited (HKG: 1617) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest analysis for Nanfang Communication Holdings
What is the net debt of Nanfang Communication Holdings?
You can click on the graph below for the historical figures, but it shows that as of June 2021, Nanfang Communication Holdings had a debt of CN 543.2 million, an increase from CN’s 181.4 million, over a year. However, he also had CN 408.6 million in cash, so his net debt was CN 134.6 million.
A look at the responsibilities of Nanfang Communication Holdings
Zooming in on the latest balance sheet data, we can see that Nanfang Communication Holdings had liabilities of CND 728.4 million owed within 12 months and CN’s 20.5 million liabilities owed beyond. In compensation for these obligations, he had cash of CN 408.6 million as well as receivables valued at CN 530.4 million due within 12 months. So he actually CN Â¥ 190.1m Following liquid assets as total liabilities.
This surplus strongly suggests that Nanfang Communication Holdings has a rock solid balance sheet (and debt is not of concern). Given this fact, we believe its track record is as strong as an ox. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Nanfang Communication Holdings that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over 12 months, Nanfang Communication Holdings recorded a loss in EBIT level and saw its turnover fall to CN 343 million, a decrease of 5.3%. This is not what we hope to see.
During the past twelve months, Nanfang Communication Holdings has recorded a loss of profit before interest and taxes (EBIT). Indeed, he lost a very considerable amount of CN 54 million in EBIT. Having said that, we are impressed by the strong liquidity of the balance sheet. This will give the company time and space to grow and develop its activities according to its needs. The business is risky because it will grow in the future to achieve profitability and free cash flow. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 5 warning signs for Nanfang Communication Holdings (2 shouldn’t be ignored!) Which you should be aware of before investing here.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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