Is IDG Energy Investment (HKG:650) Using Debt In A Risky Way?

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. We can see that IDG Energy Investment Limited (HKG:650) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for IDG Energy Investment

How Much Debt Does IDG Energy Investment Carry?

The image below, which you can click on for greater detail, shows that IDG Energy Investment had debt of HK$45.7m at the end of March 2019, a reduction from HK$301.3m over a year. However, it does have HK$1.21b in cash offsetting this, leading to net cash of HK$1.16b.

How Healthy Is IDG Energy Investment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IDG Energy Investment had liabilities of HK$226.5m due within 12 months and liabilities of HK$128.8m due beyond that. On the other hand, it had cash of HK$1.21b and HK$60.2m worth of receivables due within a year. So it can boast HK$914.4m more liquid assets than total liabilities.

This surplus suggests that IDG Energy Investment is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that IDG Energy Investment has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since IDG Energy Investment 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.

In the last year IDG Energy Investment managed to grow its revenue by 36%, to HK$168m. With any luck the company will be able to grow its way to profitability.

So How Risky Is IDG Energy Investment?

Although IDG Energy Investment had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of HK$27m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 36% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting IDG Energy Investment insider transactions.

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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