Is CECEP Techand Ecology&EnvironmentLtd (SZSE:300197) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies CECEP Techand Ecology&Environment Co.,Ltd. (SZSE:300197) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CECEP Techand Ecology&EnvironmentLtd

What Is CECEP Techand Ecology&EnvironmentLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that CECEP Techand Ecology&EnvironmentLtd had CN¥15.6b of debt in March 2024, down from CN¥16.8b, one year before. However, it does have CN¥2.01b in cash offsetting this, leading to net debt of about CN¥13.6b.

How Healthy Is CECEP Techand Ecology&EnvironmentLtd's Balance Sheet?

We can see from the most recent balance sheet that CECEP Techand Ecology&EnvironmentLtd had liabilities of CN¥16.1b falling due within a year, and liabilities of CN¥7.52b due beyond that. Offsetting this, it had CN¥2.01b in cash and CN¥7.80b in receivables that were due within 12 months. So its liabilities total CN¥13.8b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥4.57b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, CECEP Techand Ecology&EnvironmentLtd would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CECEP Techand Ecology&EnvironmentLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CECEP Techand Ecology&EnvironmentLtd had a loss before interest and tax, and actually shrunk its revenue by 57%, to CN¥1.2b. 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. Indeed, it lost a very considerable CN¥1.3b at the EBIT level. 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. Nevertheless, we would not bet on it given that it lost CN¥1.7b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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 example, we've discovered 2 warning signs for CECEP Techand Ecology&EnvironmentLtd that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com