The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, DeTai New Energy Group Limited (HKG:559) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for DeTai New Energy Group

What Is DeTai New Energy Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 DeTai New Energy Group had HK$139.7m of debt, an increase on HK$146, over one year. But it also has HK$322.4m in cash to offset that, meaning it has HK$182.7m net cash.

How Healthy Is DeTai New Energy Group's Balance Sheet?

The latest balance sheet data shows that DeTai New Energy Group had liabilities of HK$104.4m due within a year, and liabilities of HK$200.9m falling due after that. Offsetting these obligations, it had cash of HK$322.4m as well as receivables valued at HK$140.6m due within 12 months. So it can boast HK$157.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that DeTai New Energy Group's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, DeTai New Energy Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is DeTai New Energy Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, DeTai New Energy Group reported revenue of HK$63m, which is a gain of 5.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is DeTai New Energy Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year DeTai New Energy Group had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through HK$68m of cash and made a loss of HK$155m. But the saving grace is the HK$182.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how DeTai New Energy Group's profit, revenue, and operating cashflow have changed over the last few years.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.