Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Newton Resources Ltd. (HKG:1231) uses debt in his business. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Newton Resources
How much debt does Newton Resources have?
As you can see below, Newton Resources had US$5.12 million in debt as of December 2021, up from US$20.3 million the previous year. However, his balance sheet shows that he holds $14.5 million in cash, so he actually has $9.38 million in net cash.
How healthy is Newton Resources’ balance sheet?
According to the last published balance sheet, Newton Resources had liabilities of $7.36 million due within 12 months and liabilities of $158,000 due beyond 12 months. On the other hand, it had $14.5 million in cash and $1.37 million in receivables within one year. So he actually has 8.36 million US dollars After liquid assets than total liabilities.
This short-term liquidity is a sign that Newton Resources could probably service its debt easily, as its balance sheet is far from stretched. Simply put, the fact that Newton Resources has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Newton Resources that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Year-over-year, Newton Resources recorded a loss in EBIT, and saw its revenue fall to US$293m, a decline of 37%. It makes us nervous, to say the least.
So how risky are Newton’s resources?
While Newton Resources lost money in earnings before interest and tax (EBIT), it actually generated positive free cash flow of US$16 million. So taking that at face value and given the net cash position, we don’t think the stock is too risky in the near term. With lackluster revenue growth over the past year, we don’t find the investment opportunity particularly attractive. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for Newton Resources you should be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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