Is CCIAM Future Energy (HKG:145) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies CCIAM Future Energy Limited (HKG:145) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CCIAM Future Energy

What Is CCIAM Future Energy's Debt?

The chart below, which you can click on for greater detail, shows that CCIAM Future Energy had HK$24.5m in debt in December 2021; about the same as the year before. However, because it has a cash reserve of HK$18.9m, its net debt is less, at about HK$5.60m.

How Healthy Is CCIAM Future Energy's Balance Sheet?

According to the balance sheet data, CCIAM Future Energy had liabilities of HK$34.1m due within 12 months, but no longer term liabilities. On the other hand, it had cash of HK$18.9m and HK$20.2m worth of receivables due within a year. So it actually has HK$5.02m more liquid assets than total liabilities.

This surplus suggests that CCIAM Future Energy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since CCIAM Future Energy 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, CCIAM Future Energy made a loss at the EBIT level, and saw its revenue drop to HK$7.6m, which is a fall of 5.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, CCIAM Future Energy had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$44m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. 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 is a bit concerning) 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.

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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.