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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that REPT BATTERO Energy Co., Ltd. (HKG:666) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is REPT BATTERO Energy's Net Debt?

As you can see below, at the end of June 2024, REPT BATTERO Energy had CN¥9.87b of debt, up from CN¥7.13b a year ago. Click the image for more detail. On the flip side, it has CN¥8.64b in cash leading to net debt of about CN¥1.23b.

How Strong Is REPT BATTERO Energy's Balance Sheet?

We can see from the most recent balance sheet that REPT BATTERO Energy had liabilities of CN¥18.6b falling due within a year, and liabilities of CN¥9.09b due beyond that. Offsetting this, it had CN¥8.64b in cash and CN¥6.12b in receivables that were due within 12 months. So it has liabilities totalling CN¥13.0b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since REPT BATTERO Energy has a market capitalization of CN¥30.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if REPT BATTERO Energy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, REPT BATTERO Energy made a loss at the EBIT level, and saw its revenue drop to CN¥15b, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

While REPT BATTERO Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥1.8b. 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 CN¥1.4b of cash over the last year. So to be blunt we think it is risky. 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 REPT BATTERO Energy's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.