Central New Energy Holding Group (HKG:1735) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, '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. As with many other companies Central New Energy Holding Group Limited (HKG:1735) makes use of debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

What Is Central New Energy Holding Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Central New Energy Holding Group had HK$1.98b of debt, an increase on HK$1.12b, over one year. However, it does have HK$312.5m in cash offsetting this, leading to net debt of about HK$1.67b.

How Strong Is Central New Energy Holding Group's Balance Sheet?

We can see from the most recent balance sheet that Central New Energy Holding Group had liabilities of HK$2.62b falling due within a year, and liabilities of HK$321.9m due beyond that. On the other hand, it had cash of HK$312.5m and HK$1.44b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.19b.

Given Central New Energy Holding Group has a market capitalization of HK$42.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Central New Energy Holding Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Check out our latest analysis for Central New Energy Holding Group

In the last year Central New Energy Holding Group wasn't profitable at an EBIT level, but managed to grow its revenue by 50%, to HK$6.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Central New Energy Holding Group still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$65m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$1.1b of cash over the last year. So suffice it to say we do consider the stock to be risky. 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, we've discovered 2 warning signs for Central New Energy Holding Group that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.