New Times Energy (HKG:166) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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.' 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. We can see that New Times Energy Corporation Limited (HKG:166) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

You can click the graphic below for the historical numbers, but it shows that New Times Energy had HK$38.0m of debt in June 2021, down from HK$151.5m, one year before. However, its balance sheet shows it holds HK$470.2m in cash, so it actually has HK$432.2m net cash.

How Healthy Is New Times Energy's Balance Sheet?

According to the last reported balance sheet, New Times Energy had liabilities of HK$190.0m due within 12 months, and liabilities of HK$31.5m due beyond 12 months. On the other hand, it had cash of HK$470.2m and HK$17.5m worth of receivables due within a year. So it can boast HK$266.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that New Times Energy's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 you can't view debt in total isolation; since New Times Energy will need earnings to service that debt. 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$9.7b, which is a gain of 2,821%, 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 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. And over the same period it saw negative free cash outflow of HK$77m and booked a HK$49m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$432.2m. That means it could keep spending at its current rate for more than two years. Importantly, New Times Energy's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. 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 2 warning signs for New Times Energy (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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