CCIAM Future Energy (HKG:145) Has Debt But No Earnings; Should You Worry?

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.' 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, CCIAM Future Energy Limited (HKG:145) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CCIAM Future Energy

How Much Debt Does CCIAM Future Energy Carry?

As you can see below, at the end of June 2021, CCIAM Future Energy had HK$24.0m of debt, up from HK$21.9m a year ago. Click the image for more detail. However, it does have HK$25.9m in cash offsetting this, leading to net cash of HK$1.86m.

A Look At CCIAM Future Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that CCIAM Future Energy had liabilities of HK$40.8m due within 12 months and liabilities of HK$3.50m due beyond that. Offsetting this, it had HK$25.9m in cash and HK$30.5m in receivables that were due within 12 months. So it actually has HK$12.1m more liquid assets than total liabilities.

This short term liquidity is a sign that CCIAM Future Energy could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CCIAM Future Energy boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is CCIAM Future Energy's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year CCIAM Future Energy had a loss before interest and tax, and actually shrunk its revenue by 53%, to HK$12m. To be frank that doesn't bode well.

So How Risky Is CCIAM Future Energy?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CCIAM Future Energy 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$5.9m and booked a HK$82m accounting loss. Given it only has net cash of HK$1.86m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for CCIAM Future Energy you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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