Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, China Environmental Technology and Bioenergy Holdings Limited (HKG:1237) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 China Environmental Technology and Bioenergy Holdings
What Is China Environmental Technology and Bioenergy Holdings's Debt?
The image below, which you can click on for greater detail, shows that at June 2024 China Environmental Technology and Bioenergy Holdings had debt of CN¥132.0m, up from CN¥88.2m in one year. But on the other hand it also has CN¥468.5m in cash, leading to a CN¥336.5m net cash position.
How Healthy Is China Environmental Technology and Bioenergy Holdings' Balance Sheet?
The latest balance sheet data shows that China Environmental Technology and Bioenergy Holdings had liabilities of CN¥247.5m due within a year, and liabilities of CN¥16.7m falling due after that. Offsetting this, it had CN¥468.5m in cash and CN¥53.7m in receivables that were due within 12 months. So it actually has CN¥257.9m more liquid assets than total liabilities.
This surplus strongly suggests that China Environmental Technology and Bioenergy Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, China Environmental Technology and Bioenergy Holdings 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 China Environmental Technology and Bioenergy Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, China Environmental Technology and Bioenergy Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥305m, which is a fall of 11%. We would much prefer see growth.
So How Risky Is China Environmental Technology and Bioenergy Holdings?
While China Environmental Technology and Bioenergy Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥73m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for China Environmental Technology and Bioenergy Holdings that you should be aware of.
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.