Health Check: How Prudently Does Kingenta Ecological Engineering Group (SZSE:002470) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Kingenta Ecological Engineering Group Co., Ltd. (SZSE:002470) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kingenta Ecological Engineering Group

What Is Kingenta Ecological Engineering Group's Debt?

As you can see below, Kingenta Ecological Engineering Group had CN¥4.45b of debt at June 2024, down from CN¥4.88b a year prior. However, it does have CN¥1.26b in cash offsetting this, leading to net debt of about CN¥3.18b.

How Strong Is Kingenta Ecological Engineering Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kingenta Ecological Engineering Group had liabilities of CN¥7.00b due within 12 months and liabilities of CN¥2.18b due beyond that. Offsetting this, it had CN¥1.26b in cash and CN¥598.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.32b.

Given this deficit is actually higher than the company's market capitalization of CN¥5.45b, we think shareholders really should watch Kingenta Ecological Engineering Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kingenta Ecological Engineering Group 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 Kingenta Ecological Engineering Group had a loss before interest and tax, and actually shrunk its revenue by 2.7%, to CN¥8.5b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Kingenta Ecological Engineering Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥355m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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¥651m. In the meantime, we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Kingenta Ecological Engineering Group's profit, revenue, and operating cashflow have changed over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.