Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that NWS Holdings Limited (HKG:659) does have debt on its balance sheet. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for NWS Holdings

How Much Debt Does NWS Holdings Carry?

As you can see below, NWS Holdings had HK$20.1b of debt at December 2021, down from HK$25.4b a year prior. However, its balance sheet shows it holds HK$28.2b in cash, so it actually has HK$8.05b net cash.

How Healthy Is NWS Holdings' Balance Sheet?

The latest balance sheet data shows that NWS Holdings had liabilities of HK$51.5b due within a year, and liabilities of HK$40.9b falling due after that. Offsetting these obligations, it had cash of HK$28.2b as well as receivables valued at HK$8.78b due within 12 months. So its liabilities total HK$55.5b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$27.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, NWS Holdings would likely require a major re-capitalisation if it had to pay its creditors today. NWS Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NWS Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, NWS Holdings reported revenue of HK$30b, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is NWS Holdings?

Although NWS Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$1.9b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that NWS Holdings is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.