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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Beijing Orient Landscape& Environment Co.,Ltd. (SZSE:002310) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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.

View our latest analysis for Beijing Orient Landscape& EnvironmentLtd

What Is Beijing Orient Landscape& EnvironmentLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Beijing Orient Landscape& EnvironmentLtd had debt of CN¥22.6b, up from CN¥20.8b in one year. However, it does have CN¥673.4m in cash offsetting this, leading to net debt of about CN¥22.0b.

How Healthy Is Beijing Orient Landscape& EnvironmentLtd's Balance Sheet?

We can see from the most recent balance sheet that Beijing Orient Landscape& EnvironmentLtd had liabilities of CN¥30.1b falling due within a year, and liabilities of CN¥5.15b due beyond that. Offsetting these obligations, it had cash of CN¥673.4m as well as receivables valued at CN¥15.8b due within 12 months. So its liabilities total CN¥18.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥3.73b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Beijing Orient Landscape& EnvironmentLtd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing Orient Landscape& EnvironmentLtd will need earnings to service that debt. 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.

In the last year Beijing Orient Landscape& EnvironmentLtd had a loss before interest and tax, and actually shrunk its revenue by 78%, to CN¥408m. To be frank that doesn't bode well.

Caveat Emptor

While Beijing Orient Landscape& EnvironmentLtd'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¥3.4b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through CN¥317m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Beijing Orient Landscape& EnvironmentLtd you should be aware of, and 1 of them is a bit unpleasant.

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.