Despite Lacking Profits IDG Energy Investment (HKG:650) Seems To Be On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that IDG Energy Investment Limited (HKG:650) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for IDG Energy Investment

What Is IDG Energy Investment's Debt?

The image below, which you can click on for greater detail, shows that IDG Energy Investment had debt of HK$68.4m at the end of September 2020, a reduction from HK$126.3m over a year. However, its balance sheet shows it holds HK$1.04b in cash, so it actually has HK$972.4m net cash.

A Look At IDG Energy Investment's Liabilities

Zooming in on the latest balance sheet data, we can see that IDG Energy Investment had liabilities of HK$219.4m due within 12 months and liabilities of HK$227.7m due beyond that. Offsetting these obligations, it had cash of HK$1.04b as well as receivables valued at HK$27.7m due within 12 months. So it can boast HK$621.3m more liquid assets than total liabilities.

It's good to see that IDG Energy Investment has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, IDG Energy Investment 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 IDG Energy Investment's earnings that will influence how the balance sheet holds up in the future. 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, IDG Energy Investment reported revenue of HK$492m, which is a gain of 195%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is IDG Energy Investment?

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 IDG Energy Investment lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$24m and booked a HK$307m accounting loss. With only HK$972.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, IDG Energy Investment's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. For riskier companies like IDG Energy Investment I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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. 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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