Is DeTai New Energy Group (HKG:559) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that DeTai New Energy Group Limited (HKG:559) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for DeTai New Energy Group

How Much Debt Does DeTai New Energy Group Carry?

You can click the graphic below for the historical numbers, but it shows that DeTai New Energy Group had HK$66.2m of debt in December 2021, down from HK$185.4m, one year before. However, its balance sheet shows it holds HK$413.4m in cash, so it actually has HK$347.2m net cash.

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

According to the last reported balance sheet, DeTai New Energy Group had liabilities of HK$78.5m due within 12 months, and liabilities of HK$53.1m due beyond 12 months. On the other hand, it had cash of HK$413.4m and HK$46.7m worth of receivables due within a year. So it actually has HK$328.4m 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. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year DeTai New Energy Group wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to HK$40m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is DeTai New Energy Group?

While DeTai New Energy Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$50m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We also take heart from the solid 28% revenue growth in 12 months; undoubtedly a good sign. That growth could mean this is one stock well worth watching. 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. To that end, you should be aware of the 2 warning signs we've spotted with DeTai New Energy Group .

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.