Is DeTai New Energy Group (HKG:559) Using Too Much Debt?

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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for DeTai New Energy Group

What Is DeTai New Energy Group's Net 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 it also has HK$249.2m in cash to offset that, meaning it has HK$227.5m net cash.

A Look At DeTai New Energy Group's Liabilities

The latest balance sheet data shows that DeTai New Energy Group had liabilities of HK$28.7m due within a year, and liabilities of HK$33.8m falling due after that. Offsetting these obligations, it had cash of HK$249.2m as well as receivables valued at HK$8.72m due within 12 months. So it actually has HK$195.4m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, DeTai New Energy Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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. We usually like to see faster growth from unprofitable companies, but each to their own.

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 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$15m and booked a HK$10m accounting loss. But the saving grace is the HK$227.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for DeTai New Energy Group you should know about.

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.