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.' 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. As with many other companies Ev Dynamics (Holdings) Limited (HKG:476) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.
View our latest analysis for Ev Dynamics (Holdings)
What Is Ev Dynamics (Holdings)'s Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Ev Dynamics (Holdings) had debt of HK$16.7m, up from HK$13.6m in one year. But it also has HK$29.3m in cash to offset that, meaning it has HK$12.6m net cash.
How Strong Is Ev Dynamics (Holdings)'s Balance Sheet?
According to the last reported balance sheet, Ev Dynamics (Holdings) had liabilities of HK$98.6m due within 12 months, and liabilities of HK$4.93m due beyond 12 months. Offsetting these obligations, it had cash of HK$29.3m as well as receivables valued at HK$72.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.22m.
This state of affairs indicates that Ev Dynamics (Holdings)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the HK$134.6m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Ev Dynamics (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ev Dynamics (Holdings) will need earnings to service that debt. 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.
Over 12 months, Ev Dynamics (Holdings) reported revenue of HK$71m, which is a gain of 239%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Ev Dynamics (Holdings)?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Ev Dynamics (Holdings) had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$14m and booked a HK$142m accounting loss. But at least it has HK$12.6m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Ev Dynamics (Holdings) has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Ev Dynamics (Holdings) (of which 1 shouldn't be ignored!) you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
About SEHK:476
Ev Dynamics (Holdings)
An investment holding company, manufactures and sells electric vehicles in Mexico.
Slight with imperfect balance sheet.