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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that IDG Energy Investment Limited (HKG:650) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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

View our latest analysis for IDG Energy Investment

How Much Debt Does IDG Energy Investment Carry?

As you can see below, IDG Energy Investment had HK$59.8m of debt at March 2021, down from HK$127.6m a year prior. But on the other hand it also has HK$1.06b in cash, leading to a HK$998.4m net cash position.

How Healthy Is IDG Energy Investment's Balance Sheet?

According to the last reported balance sheet, IDG Energy Investment had liabilities of HK$355.8m due within 12 months, and liabilities of HK$205.4m due beyond 12 months. On the other hand, it had cash of HK$1.06b and HK$98.6m worth of receivables due within a year. So it can boast HK$595.5m more liquid assets than total liabilities.

This short term liquidity is a sign that IDG Energy Investment could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that IDG Energy Investment 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 it is IDG Energy Investment'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 IDG Energy Investment wasn't profitable at an EBIT level, but managed to grow its revenue by 623%, to HK$1.8b. That's virtually the hole-in-one of revenue growth!

So How Risky Is IDG Energy Investment?

While IDG Energy Investment lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$36m. 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. Keeping in mind its 623% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with IDG Energy Investment (including 1 which doesn't sit too well with us) .

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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