Health Check: How Prudently Does Central New Energy Holding Group (HKG:1735) Use Debt?

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.' 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 Central New Energy Holding Group Limited (HKG:1735) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Central New Energy Holding Group

How Much Debt Does Central New Energy Holding Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Central New Energy Holding Group had HK$499.7m of debt, an increase on HK$107.0m, over one year. But on the other hand it also has HK$614.8m in cash, leading to a HK$115.1m net cash position.

How Healthy Is Central New Energy Holding Group's Balance Sheet?

The latest balance sheet data shows that Central New Energy Holding Group had liabilities of HK$895.5m due within a year, and liabilities of HK$407.3m falling due after that. On the other hand, it had cash of HK$614.8m and HK$445.8m worth of receivables due within a year. So it has liabilities totalling HK$242.3m more than its cash and near-term receivables, combined.

Having regard to Central New Energy Holding Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$20.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Central New Energy Holding Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Central New Energy Holding Group 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.

In the last year Central New Energy Holding Group wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to HK$1.6b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Central New Energy Holding Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Central New Energy Holding Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$146m and booked a HK$28m accounting loss. But the saving grace is the HK$115.1m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Central New Energy Holding Group's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Central New Energy Holding Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.