Stock Analysis

Is China Titans Energy Technology Group (HKG:2188) A Risky Investment?

SEHK:2188
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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 China Titans Energy Technology Group Co., Limited (HKG:2188) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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¥163.8m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥79.5m in cash offsetting this, leading to net debt of about CN¥84.3m.

debt-equity-history-analysis
SEHK:2188 Debt to Equity History April 7th 2022

How Strong Is China Titans Energy Technology Group's Balance Sheet?

The latest balance sheet data shows that China Titans Energy Technology Group had liabilities of CN¥282.2m due within a year, and liabilities of CN¥61.4m falling due after that. On the other hand, it had cash of CN¥79.5m and CN¥323.9m worth of receivables due within a year. So it can boast CN¥59.8m more liquid assets than total liabilities.

This surplus suggests that China Titans Energy Technology Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Even though China Titans Energy Technology Group's debt is only 2.0, its interest cover is really very low at 2.4. This does suggest the company is paying fairly high interest rates. Either way there's no doubt the stock is using meaningful leverage. We also note that China Titans Energy Technology Group improved its EBIT from a last year's loss to a positive CN¥23m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Titans Energy Technology 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, China Titans Energy Technology Group recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

China Titans Energy Technology Group's interest cover was a real negative on this analysis, as was its conversion of EBIT to free cash flow. But its level of total liabilities was significantly redeeming. When we consider all the factors mentioned above, we do feel a bit cautious about China Titans Energy Technology Group's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that China Titans Energy Technology Group is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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.