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.' 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. Importantly, Add New Energy Investment Holdings Group Limited (HKG:2623) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Add New Energy Investment Holdings Group

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

The image below, which you can click on for greater detail, shows that Add New Energy Investment Holdings Group had debt of CN¥180.6m at the end of December 2021, a reduction from CN¥189.5m over a year. But on the other hand it also has CN¥191.3m in cash, leading to a CN¥10.6m net cash position.

How Strong 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¥397.4m falling due within a year, and liabilities of CN¥21.3m due beyond that. Offsetting these obligations, it had cash of CN¥191.3m as well as receivables valued at CN¥30.0m due within 12 months. So it has liabilities totalling CN¥197.5m more than its cash and near-term receivables, combined.

Add New Energy Investment Holdings Group has a market capitalization of CN¥435.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Add New Energy Investment Holdings Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Add New Energy Investment Holdings Group will need earnings to service that debt. 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.

In the last year Add New Energy Investment Holdings Group wasn't profitable at an EBIT level, but managed to grow its revenue by 69%, to CN¥1.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Add New Energy Investment Holdings Group?

While Add New Energy Investment Holdings Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥77m. 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. The good news for Add New Energy Investment Holdings Group shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Add New Energy Investment Holdings Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.