Health Check: How Prudently Does New Times Energy (HKG:166) Use Debt?

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. We note that New Times Energy Corporation Limited (HKG:166) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for New Times Energy

What Is New Times Energy's Net Debt?

The image below, which you can click on for greater detail, shows that New Times Energy had debt of HK$151.5m at the end of June 2020, a reduction from HK$210.8m over a year. But it also has HK$724.0m in cash to offset that, meaning it has HK$572.5m net cash.

How Healthy Is New Times Energy's Balance Sheet?

The latest balance sheet data shows that New Times Energy had liabilities of HK$198.0m due within a year, and liabilities of HK$68.2m falling due after that. On the other hand, it had cash of HK$724.0m and HK$17.8m worth of receivables due within a year. So it actually has HK$475.7m more liquid assets than total liabilities.

This surplus liquidity suggests that New Times Energy's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, New Times Energy boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is New Times Energy's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, New Times Energy reported revenue of HK$331m, which is a gain of 11%, 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 New Times Energy?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year New Times Energy 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$145m and booked a HK$2.3b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$572.5m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for New Times Energy you should be aware of, and 1 of them is significant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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