Here's Why CCIAM Future Energy (HKG:145) Can Afford Some 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.' 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. We can see that CCIAM Future Energy Limited (HKG:145) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CCIAM Future Energy

What Is CCIAM Future Energy's Net Debt?

The chart below, which you can click on for greater detail, shows that CCIAM Future Energy had HK$23.4m in debt in June 2022; about the same as the year before. On the flip side, it has HK$12.3m in cash leading to net debt of about HK$11.1m.

How Healthy Is CCIAM Future Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CCIAM Future Energy had liabilities of HK$33.2m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of HK$12.3m as well as receivables valued at HK$17.9m due within 12 months. So it has liabilities totalling HK$3.00m more than its cash and near-term receivables, combined.

Given CCIAM Future Energy has a market capitalization of HK$128.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CCIAM Future Energy's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, CCIAM Future Energy made a loss at the EBIT level, and saw its revenue drop to HK$4.5m, which is a fall of 63%. To be frank that doesn't bode well.

Caveat Emptor

While CCIAM Future Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$18m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$3.4m of cash over the last year. So to be blunt we think it is 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. For instance, we've identified 3 warning signs for CCIAM Future Energy (1 can't be ignored) you should be aware of.

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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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.