David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Add New Energy Investment Holdings Group Limited (HKG: 2623) uses debt in his business. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest analysis for Add New Energy Investment Holdings Group
How much debt does Add New Energy Investment Holdings Group have?
The image below, which you can click for more details, shows that in June 2021, Add New Energy Investment Holdings Group had a debt of CN 186.7 million, compared to CN 167.9 million in one. year. However, he has CNN 140.4 million in cash offsetting this, which leads to net debt of around CNN 46.2 million.
A look at the liabilities of the Add New Energy Investment Holdings group
Zooming in on the latest balance sheet data, we can see that Add New Energy Investment Holdings Group had liabilities of CN 335.3 million due within 12 months and liabilities of CN 73.5 million beyond. In return, it had CN 140.4 million in cash and CN 30.9 million in receivables due within 12 months. Thus, its liabilities total CNN 237.6 million more than the combination of its cash and short-term receivables.
Add New Energy Investment Holdings Group has a market cap of CNN 685.7 million, so it could most likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Given that net debt is only 1.0 times EBITDA, it is initially surprising to see that Add New Energy Investment Holdings Group’s EBIT has low interest coverage of 1.8 times. So while we are not necessarily alarmed, we think his debt is far from negligible. We also note that the Add New Energy Investment Holdings group improved its EBIT from a loss last year to a positive CN ¥ 31m. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the earnings of Add New Energy Investment Holdings Group that will influence balance sheet performance in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) translate into actual free cash flow. Over the past year, Add New Energy Investment Holdings Group has experienced substantial total negative free cash flow. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
Our point of view
To be frank, Add New Energy Investment Holdings Group’s interest coverage and track record of converting EBIT to free cash flow makes us rather uncomfortable with its leverage levels. But at least it manages its debt fairly well, based on its EBITDA; it’s encouraging. Once we consider all of the above factors together it seems to us that the debt of the Add New Energy Investment Holdings group makes it a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for Add New Energy Investment Holdings Group (1 is of concern) you must be aware.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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