Is Nanfang Communication Holdings (HKG:1617) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Nanfang Communication Holdings Limited (HKG:1617) makes use of debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Nanfang Communication Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Nanfang Communication Holdings had CN¥259.0m of debt in June 2025, down from CN¥447.8m, one year before. However, it does have CN¥271.1m in cash offsetting this, leading to net cash of CN¥12.1m.

How Strong Is Nanfang Communication Holdings' Balance Sheet?

The latest balance sheet data shows that Nanfang Communication Holdings had liabilities of CN¥400.8m due within a year, and liabilities of CN¥151.3m falling due after that. On the other hand, it had cash of CN¥271.1m and CN¥349.5m worth of receivables due within a year. So it actually has CN¥68.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Nanfang Communication Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Nanfang Communication Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Nanfang Communication Holdings

We also note that Nanfang Communication Holdings improved its EBIT from a last year's loss to a positive CN¥16m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Nanfang Communication Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Nanfang Communication Holdings 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 year, Nanfang Communication Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nanfang Communication Holdings has net cash of CN¥12.1m, as well as more liquid assets than liabilities. So we are not troubled with Nanfang Communication Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Nanfang Communication Holdings is showing 3 warning signs in our investment analysis , you should know about...

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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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.