Is Heilongjiang Interchina Water TreatmentLtd (SHSE:600187) Using Too Much Debt?

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. We note that Heilongjiang Interchina Water Treatment Co.,Ltd (SHSE:600187) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Heilongjiang Interchina Water TreatmentLtd

What Is Heilongjiang Interchina Water TreatmentLtd's Debt?

The image below, which you can click on for greater detail, shows that Heilongjiang Interchina Water TreatmentLtd had debt of CN¥136.2m at the end of March 2024, a reduction from CN¥170.2m over a year. But it also has CN¥416.1m in cash to offset that, meaning it has CN¥279.9m net cash.

How Healthy Is Heilongjiang Interchina Water TreatmentLtd's Balance Sheet?

The latest balance sheet data shows that Heilongjiang Interchina Water TreatmentLtd had liabilities of CN¥199.3m due within a year, and liabilities of CN¥205.7m falling due after that. Offsetting these obligations, it had cash of CN¥416.1m as well as receivables valued at CN¥439.9m due within 12 months. So it actually has CN¥451.1m more liquid assets than total liabilities.

This surplus suggests that Heilongjiang Interchina Water TreatmentLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Heilongjiang Interchina Water TreatmentLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Heilongjiang Interchina Water TreatmentLtd 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 Heilongjiang Interchina Water TreatmentLtd had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥193m. To be frank that doesn't bode well.

So How Risky Is Heilongjiang Interchina Water TreatmentLtd?

Although Heilongjiang Interchina Water TreatmentLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥49m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should learn about the 3 warning signs we've spotted with Heilongjiang Interchina Water TreatmentLtd (including 2 which don't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.