Is DeTai New Energy Group (HKG:559) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for DeTai New Energy Group

What Is DeTai New Energy Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that DeTai New Energy Group had HK$31.0m of debt in December 2023, down from HK$52.2m, one year before. But it also has HK$266.6m in cash to offset that, meaning it has HK$235.6m net cash.

How Healthy Is DeTai New Energy Group's Balance Sheet?

The latest balance sheet data shows that DeTai New Energy Group had liabilities of HK$41.6m due within a year, and liabilities of HK$38.5m falling due after that. On the other hand, it had cash of HK$266.6m and HK$8.83m worth of receivables due within a year. So it actually has HK$195.3m more liquid assets than total liabilities.

This luscious liquidity implies that DeTai New Energy Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. 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. 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 DeTai New Energy Group 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, DeTai New Energy Group reported revenue of HK$30m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is DeTai New Energy Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year DeTai New Energy Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$8.9m and booked a HK$77m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$235.6m. That means it could keep spending at its current rate for more than two years. 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 2 warning signs for DeTai New Energy Group you should be aware of.

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.