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

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.' 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. Importantly, DeTai New Energy Group Limited (HKG:559) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is DeTai New Energy Group's Debt?

The image below, which you can click on for greater detail, shows that DeTai New Energy Group had debt of HK$21.7m at the end of December 2024, a reduction from HK$31.0m over a year. But on the other hand it also has HK$249.2m in cash, leading to a HK$227.5m net cash position.

A Look At DeTai New Energy Group's Liabilities

We can see from the most recent balance sheet that DeTai New Energy Group had liabilities of HK$28.7m falling due within a year, and liabilities of HK$33.8m due beyond that. On the other hand, it had cash of HK$249.2m and HK$8.27m worth of receivables due within a year. So it actually has HK$195.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that DeTai New Energy Group's balance sheet is almost as strong as Fort Knox. 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. There's no doubt that we learn most about debt from the balance sheet. But it is DeTai New Energy Group'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.

View our latest analysis for DeTai New Energy Group

Over 12 months, DeTai New Energy Group reported revenue of HK$32m, which is a gain of 5.3%, 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?

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. And over the same period it saw negative free cash outflow of HK$13m and booked a HK$10m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$227.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that DeTai New Energy Group is showing 3 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.