DeTai New Energy Group (HKG:559) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that DeTai New Energy Group Limited (HKG:559) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for DeTai New Energy Group

What Is DeTai New Energy Group's Net Debt?

The chart below, which you can click on for greater detail, shows that DeTai New Energy Group had HK$141.4m in debt in December 2020; about the same as the year before. But on the other hand it also has HK$344.8m in cash, leading to a HK$203.4m net cash position.

A Look At DeTai New Energy Group's Liabilities

According to the last reported balance sheet, DeTai New Energy Group had liabilities of HK$208.1m due within 12 months, and liabilities of HK$65.4m due beyond 12 months. Offsetting these obligations, it had cash of HK$344.8m as well as receivables valued at HK$140.9m due within 12 months. So it actually has HK$212.2m more liquid assets than total liabilities.

This surplus liquidity suggests that DeTai New Energy Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that DeTai New Energy Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since DeTai New Energy 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.

Over 12 months, DeTai New Energy Group made a loss at the EBIT level, and saw its revenue drop to HK$34m, which is a fall of 43%. That makes us nervous, to say the least.

So How Risky Is DeTai New Energy Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months DeTai New Energy Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$6.8m of cash and made a loss of HK$186m. Given it only has net cash of HK$203.4m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 3 warning signs with DeTai New Energy Group , and understanding them should be part of your investment process.

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. 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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