Would M-Grass Ecology And Environment (Group) (SZSE:300355) Be Better Off With Less Debt?

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. We can see that M-Grass Ecology And Environment (Group) Co., Ltd. (SZSE:300355) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for M-Grass Ecology And Environment (Group)

How Much Debt Does M-Grass Ecology And Environment (Group) Carry?

The image below, which you can click on for greater detail, shows that at September 2024 M-Grass Ecology And Environment (Group) had debt of CN¥5.93b, up from CN¥5.70b in one year. However, it also had CN¥891.8m in cash, and so its net debt is CN¥5.04b.

How Healthy Is M-Grass Ecology And Environment (Group)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that M-Grass Ecology And Environment (Group) had liabilities of CN¥5.97b due within 12 months and liabilities of CN¥3.72b due beyond that. Offsetting these obligations, it had cash of CN¥891.8m as well as receivables valued at CN¥5.61b due within 12 months. So it has liabilities totalling CN¥3.19b more than its cash and near-term receivables, combined.

This deficit isn't so bad because M-Grass Ecology And Environment (Group) is worth CN¥8.10b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is M-Grass Ecology And Environment (Group)'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 M-Grass Ecology And Environment (Group) had a loss before interest and tax, and actually shrunk its revenue by 9.5%, to CN¥1.9b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months M-Grass Ecology And Environment (Group) produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥127m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥43m. So to be blunt we do think it is risky. 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. For example - M-Grass Ecology And Environment (Group) has 1 warning sign we think 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.