Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that State Energy Group International Assets Holdings Limited (HKG:918) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for State Energy Group International Assets Holdings

What Is State Energy Group International Assets Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 State Energy Group International Assets Holdings had HK$60.3m of debt, an increase on HK$29.8m, over one year. However, it also had HK$44.0m in cash, and so its net debt is HK$16.3m.

How Healthy Is State Energy Group International Assets Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that State Energy Group International Assets Holdings had liabilities of HK$201.1m due within 12 months and liabilities of HK$6.72m due beyond that. Offsetting these obligations, it had cash of HK$44.0m as well as receivables valued at HK$157.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$6.44m.

Having regard to State Energy Group International Assets Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the HK$657.3m company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since State Energy Group International Assets Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, State Energy Group International Assets Holdings made a loss at the EBIT level, and saw its revenue drop to HK$176m, which is a fall of 21%. To be frank that doesn't bode well.

Caveat Emptor

Not only did State Energy Group International Assets Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$24m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$85m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example State Energy Group International Assets Holdings has 5 warning signs (and 2 which make us uncomfortable) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.