Here's Why Niche-Tech Group (HKG:8490) Can Manage Its Debt Responsibly
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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Niche-Tech Group Limited (HKG:8490) makes use of 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Niche-Tech Group
What Is Niche-Tech Group's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Niche-Tech Group had debt of HK$32.6m, up from HK$20.1m in one year. However, it does have HK$56.4m in cash offsetting this, leading to net cash of HK$23.8m.
How Healthy Is Niche-Tech Group's Balance Sheet?
We can see from the most recent balance sheet that Niche-Tech Group had liabilities of HK$51.4m falling due within a year, and liabilities of HK$22.9m due beyond that. Offsetting these obligations, it had cash of HK$56.4m as well as receivables valued at HK$95.3m due within 12 months. So it can boast HK$77.4m more liquid assets than total liabilities.
This excess liquidity suggests that Niche-Tech Group is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Niche-Tech Group boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Niche-Tech Group's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Niche-Tech Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Niche-Tech Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Niche-Tech Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While it is always sensible to investigate a company's debt, in this case Niche-Tech Group has HK$23.8m in net cash and a decent-looking balance sheet. So we are not troubled with Niche-Tech Group's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Niche-Tech Group, you may well want to click here to check an interactive graph of its earnings per share history.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
