China Titans Energy Technology Group (HKG:2188) Is Making Moderate Use Of Debt

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 China Titans Energy Technology Group Co., Limited (HKG:2188) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Titans Energy Technology Group

How Much Debt Does China Titans Energy Technology Group Carry?

As you can see below, China Titans Energy Technology Group had CN¥177.2m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥66.5m in cash, and so its net debt is CN¥110.8m.

A Look At China Titans Energy Technology Group's Liabilities

Zooming in on the latest balance sheet data, we can see that China Titans Energy Technology Group had liabilities of CN¥287.6m due within 12 months and liabilities of CN¥80.6m due beyond that. Offsetting this, it had CN¥66.5m in cash and CN¥317.3m in receivables that were due within 12 months. So it can boast CN¥15.6m more liquid assets than total liabilities.

This short term liquidity is a sign that China Titans Energy Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Titans Energy Technology Group 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, China Titans Energy Technology Group reported revenue of CN¥285m, which is a gain of 2.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, China Titans Energy Technology Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥24m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. So it seems too risky for our taste. 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. Case in point: We've spotted 2 warning signs for China Titans Energy Technology Group you should be aware of, and 1 of them is potentially serious.

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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