Does Add New Energy Investment Holdings Group (HKG:2623) Have A Healthy Balance Sheet?

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.' 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 Add New Energy Investment Holdings Group Limited (HKG:2623) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Add New Energy Investment Holdings Group

What Is Add New Energy Investment Holdings Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Add New Energy Investment Holdings Group had CN¥167.9m of debt, an increase on CN¥118.3m, over one year. However, it does have CN¥114.1m in cash offsetting this, leading to net debt of about CN¥53.8m.

How Healthy Is Add New Energy Investment Holdings Group's Balance Sheet?

We can see from the most recent balance sheet that Add New Energy Investment Holdings Group had liabilities of CN¥146.2m falling due within a year, and liabilities of CN¥144.8m due beyond that. On the other hand, it had cash of CN¥114.1m and CN¥30.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥146.1m.

This deficit is considerable relative to its market capitalization of CN¥166.3m, so it does suggest shareholders should keep an eye on Add New Energy Investment Holdings Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Add New Energy Investment Holdings Group'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, Add New Energy Investment Holdings Group reported revenue of CN¥514m, which is a gain of 67%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Add New Energy Investment Holdings Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥16m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Add New Energy Investment Holdings Group that you should be aware of.

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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