Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, New Times Energy Corporation Limited (HKG:166) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 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 examine debt levels, we first consider both cash and debt levels, together.
What Is New Times Energy's Debt?
The chart below, which you can click on for greater detail, shows that New Times Energy had HK$146.1m in debt in December 2020; about the same as the year before. But on the other hand it also has HK$783.6m in cash, leading to a HK$637.5m net cash position.
How Strong Is New Times Energy's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that New Times Energy had liabilities of HK$240.8m due within 12 months and liabilities of HK$21.4m due beyond that. Offsetting these obligations, it had cash of HK$783.6m as well as receivables valued at HK$78.2m due within 12 months. So it can boast HK$599.6m more liquid assets than total liabilities.
This luscious liquidity implies that New Times Energy's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that New Times Energy has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.
In the last year New Times Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 2,023%, to HK$5.0b. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is New Times Energy?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months New Times Energy lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$145m of cash and made a loss of HK$79m. But the saving grace is the HK$637.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, New Times Energy's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. 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 3 warning signs for New Times Energy (of which 1 is a bit concerning!) 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. 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.
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