Is Datang International Power Generation (HKG:991) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Datang International Power Generation Co., Ltd. (HKG:991) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the HK Renewable Energy industry.

What Is Datang International Power Generation's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Datang International Power Generation had CN¥168.7b of debt, an increase on CN¥148.9b, over one year. However, because it has a cash reserve of CN¥12.9b, its net debt is less, at about CN¥155.8b.

How Strong Is Datang International Power Generation's Balance Sheet?

According to the last reported balance sheet, Datang International Power Generation had liabilities of CN¥94.1b due within 12 months, and liabilities of CN¥118.7b due beyond 12 months. Offsetting this, it had CN¥12.9b in cash and CN¥20.2b in receivables that were due within 12 months. So its liabilities total CN¥179.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥55.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Datang International Power Generation would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Datang International Power Generation 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.

Over 12 months, Datang International Power Generation reported revenue of CN¥108b, which is a gain of 6.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Datang International Power Generation produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥7.5b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CN¥5.1b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Datang International Power Generation that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.