Health Check: How Prudently Does CECEP Techand Ecology&EnvironmentLtd (SZSE:300197) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that CECEP Techand Ecology&Environment Co.,Ltd. (SZSE:300197) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CECEP Techand Ecology&EnvironmentLtd

How Much Debt Does CECEP Techand Ecology&EnvironmentLtd Carry?

You can click the graphic below for the historical numbers, but it shows that CECEP Techand Ecology&EnvironmentLtd had CN¥13.2b of debt in September 2024, down from CN¥17.4b, one year before. However, it also had CN¥1.54b in cash, and so its net debt is CN¥11.7b.

A Look At CECEP Techand Ecology&EnvironmentLtd's Liabilities

The latest balance sheet data shows that CECEP Techand Ecology&EnvironmentLtd had liabilities of CN¥17.5b due within a year, and liabilities of CN¥6.63b falling due after that. On the other hand, it had cash of CN¥1.54b and CN¥8.32b worth of receivables due within a year. So it has liabilities totalling CN¥14.3b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥7.86b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, CECEP Techand Ecology&EnvironmentLtd would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CECEP Techand Ecology&EnvironmentLtd'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.

In the last year CECEP Techand Ecology&EnvironmentLtd had a loss before interest and tax, and actually shrunk its revenue by 68%, to CN¥865m. That makes us nervous, to say the least.

Caveat Emptor

While CECEP Techand Ecology&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¥1.3b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥1.8b. In the meantime, we consider the stock to be risky. 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. Case in point: We've spotted 2 warning signs for CECEP Techand Ecology&EnvironmentLtd you should be aware of.

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.