We Think China Carbon Neutral Development Group (HKG:1372) Has A Fair Chunk Of 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. As with many other companies China Carbon Neutral Development Group Limited (HKG:1372) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Carbon Neutral Development Group

What Is China Carbon Neutral Development Group's Net Debt?

As you can see below, China Carbon Neutral Development Group had HK$84.1m of debt at June 2023, down from HK$272.3m a year prior. However, it does have HK$76.6m in cash offsetting this, leading to net debt of about HK$7.47m.

How Strong Is China Carbon Neutral Development Group's Balance Sheet?

According to the last reported balance sheet, China Carbon Neutral Development Group had liabilities of HK$160.1m due within 12 months, and liabilities of HK$87.7m due beyond 12 months. Offsetting this, it had HK$76.6m in cash and HK$135.2m in receivables that were due within 12 months. So it has liabilities totalling HK$36.0m more than its cash and near-term receivables, combined.

Since publicly traded China Carbon Neutral Development Group shares are worth a total of HK$736.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, China Carbon Neutral Development Group has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Carbon Neutral Development Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, China Carbon Neutral Development Group reported revenue of HK$676m, which is a gain of 41%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate China Carbon Neutral Development Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable HK$119m at the EBIT level. 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 HK$238m. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for China Carbon Neutral Development Group that you should be aware of before investing here.

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.