Cec Environmental ProtectionLtd (SZSE:300172) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Cec Environmental Protection Co.,Ltd (SZSE:300172) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Cec Environmental ProtectionLtd

How Much Debt Does Cec Environmental ProtectionLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Cec Environmental ProtectionLtd had CN¥119.7m of debt in June 2024, down from CN¥258.5m, one year before. But it also has CN¥627.3m in cash to offset that, meaning it has CN¥507.6m net cash.

How Strong Is Cec Environmental ProtectionLtd's Balance Sheet?

According to the last reported balance sheet, Cec Environmental ProtectionLtd had liabilities of CN¥621.8m due within 12 months, and liabilities of CN¥137.9m due beyond 12 months. Offsetting this, it had CN¥627.3m in cash and CN¥962.0m in receivables that were due within 12 months. So it actually has CN¥829.6m more liquid assets than total liabilities.

This excess liquidity suggests that Cec Environmental ProtectionLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Cec Environmental ProtectionLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Cec Environmental ProtectionLtd's saving grace is its low debt levels, because its EBIT has tanked 47% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cec Environmental ProtectionLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Cec Environmental ProtectionLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Cec Environmental ProtectionLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cec Environmental ProtectionLtd has CN¥507.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in CN¥194m. So we don't think Cec Environmental ProtectionLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Cec Environmental ProtectionLtd 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.