Does Beijing Orient Landscape & Environment (SZSE:002310) Have A Healthy Balance Sheet?

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. As with many other companies Beijing Orient Landscape & Environment Co., Ltd. (SZSE:002310) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Orient Landscape & Environment

How Much Debt Does Beijing Orient Landscape & Environment Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Beijing Orient Landscape & Environment had CN¥21.6b of debt, an increase on CN¥14.5b, over one year. However, it does have CN¥755.4m in cash offsetting this, leading to net debt of about CN¥20.8b.

A Look At Beijing Orient Landscape & Environment's Liabilities

We can see from the most recent balance sheet that Beijing Orient Landscape & Environment had liabilities of CN¥29.8b falling due within a year, and liabilities of CN¥5.47b due beyond that. Offsetting these obligations, it had cash of CN¥755.4m as well as receivables valued at CN¥19.1b due within 12 months. So it has liabilities totalling CN¥15.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥4.78b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Beijing Orient Landscape & Environment would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Beijing Orient Landscape & Environment'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.

In the last year Beijing Orient Landscape & Environment had a loss before interest and tax, and actually shrunk its revenue by 74%, to CN¥1.6b. That makes us nervous, to say the least.

Caveat Emptor

While Beijing Orient Landscape & Environment's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥3.9b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥757m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Beijing Orient Landscape & Environment , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.