Is Add New Energy Investment Holdings Group (HKG:2623) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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¥159.8m at the end of June 2022, a reduction from CN¥186.7m over a year. But on the other hand it also has CN¥311.8m in cash, leading to a CN¥151.9m net cash position.

A Look At Add New Energy Investment Holdings Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Add New Energy Investment Holdings Group had liabilities of CN¥444.5m due within 12 months and liabilities of CN¥17.3m due beyond that. On the other hand, it had cash of CN¥311.8m and CN¥35.3m worth of receivables due within a year. So it has liabilities totalling CN¥114.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Add New Energy Investment Holdings Group is worth CN¥261.9m, and thus could probably raise enough capital to shore up 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. Despite its noteworthy liabilities, Add New Energy Investment Holdings Group 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 Add New Energy Investment Holdings Group'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.

Over 12 months, Add New Energy Investment Holdings Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 16%. That's not what we would hope to see.

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¥202m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Add New Energy Investment Holdings Group has 1 warning sign we think you should be aware of.

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.