China Environmental Resources Group (HKG:1130) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies China Environmental Resources Group Limited (HKG:1130) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Environmental Resources Group

What Is China Environmental Resources Group's Debt?

As you can see below, China Environmental Resources Group had HK$32.2m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$9.44m in cash, and so its net debt is HK$22.8m.

How Healthy Is China Environmental Resources Group's Balance Sheet?

The latest balance sheet data shows that China Environmental Resources Group had liabilities of HK$82.4m due within a year, and liabilities of HK$120.6m falling due after that. Offsetting these obligations, it had cash of HK$9.44m as well as receivables valued at HK$45.5m due within 12 months. So its liabilities total HK$148.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$158.8m, so it does suggest shareholders should keep an eye on China Environmental Resources Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 China Environmental Resources Group 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.

Over 12 months, China Environmental Resources Group made a loss at the EBIT level, and saw its revenue drop to HK$70m, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

Not only did China Environmental Resources Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$23m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$46m into a profit. So in short it's a really risky stock. 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. For instance, we've identified 1 warning sign for China Environmental Resources Group that you should be aware of.

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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