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.' 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 IDG Energy Investment Limited (HKG:650) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See 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$45.1m of debt at September 2021, down from HK$68.4m a year prior. However, it does have HK$1.30b in cash offsetting this, leading to net cash of HK$1.26b.

How Healthy Is IDG Energy Investment's Balance Sheet?

We can see from the most recent balance sheet that IDG Energy Investment had liabilities of HK$202.9m falling due within a year, and liabilities of HK$97.5m due beyond that. Offsetting this, it had HK$1.30b in cash and HK$60.1m in receivables that were due within 12 months. So it actually has HK$1.06b more liquid assets than total liabilities.

This surplus suggests that IDG Energy Investment has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since IDG Energy Investment will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, IDG Energy Investment reported revenue of HK$1.8b, which is a gain of 788%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is IDG Energy Investment?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that IDG Energy Investment had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$20m and booked a HK$658m accounting loss. With only HK$1.26b on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that IDG Energy Investment has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. We've identified 3 warning signs with IDG Energy Investment (at least 1 which is significant) , and understanding them should be part of your investment process.

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.