Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Add New Energy Investment Holdings Group Limited (HKG:2623) is in debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Add New Energy Investment Holdings Group
What is the net debt of Add New Energy Investment Holdings Group?
The image below, which you can click on for more details, shows that the Add New Energy Investment Holdings group had debt of 180.6 million yen at the end of December 2021, a reduction from 189.5 million yen over one year. But on the other hand, he also has 191.3 million yen in cash, resulting in a net cash position of 10.6 million yen.
How strong is the 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 397.4 million yen due within one year, and liabilities of 21.3 million yen due beyond of the. In compensation for these obligations, it had cash of 191.3 million yen as well as receivables valued at 30.0 million yen due within 12 months. It therefore has liabilities totaling 197.5 million Canadian yen more than its cash and short-term receivables, combined.
Adding New Energy Investment Holdings Group has a market capitalization of 435.0 million Canadian yen, so it could very likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. While it has liabilities of note, Add New Energy Investment Holdings Group also has more cash than debt, so we’re fairly confident it can manage its debt safely. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Add New Energy Investment Holdings Group will need income to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Last year, Add New Energy Investment Holdings Group was not profitable in terms of EBIT, but managed to increase its revenue by 69%, to 1.6 billion yen. The shareholders probably have their fingers crossed that she can make a profit.
So, what is the risk of Add New Energy Investment Holdings Group?
While the Add New Energy Investment Holdings group lost money in earnings before interest and taxes (EBIT), it actually generated positive free cash flow of 77 million yen. So, although it is loss-making, it does not seem to have too much short-term balance sheet risk, given net cash. The good news for shareholders of the Add New Energy Investment Holdings group is that its revenue growth is strong, making it easier to raise capital when needed. But that doesn’t change our view that the stock is risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. We have 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 strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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