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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that New City Development Group Limited (HKG:456) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for New City Development Group
How Much Debt Does New City Development Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 New City Development Group had HK$364.3m of debt, an increase on HK$239.8m, over one year. However, because it has a cash reserve of HK$107.2m, its net debt is less, at about HK$257.1m.
How Healthy Is New City Development Group's Balance Sheet?
The latest balance sheet data shows that New City Development Group had liabilities of HK$46.0m due within a year, and liabilities of HK$526.2m falling due after that. Offsetting this, it had HK$107.2m in cash and HK$114.2m in receivables that were due within 12 months. So it has liabilities totalling HK$350.9m more than its cash and near-term receivables, combined.
New City Development Group has a market capitalization of HK$712.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is New City Development Group'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.