Is China Environmental Resources Group (HKG:1130) Using Debt Sensibly?

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.' 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 Environmental Resources Group Limited (HKG:1130) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Environmental Resources Group

What Is China Environmental Resources Group's Debt?

As you can see below, at the end of June 2023, China Environmental Resources Group had HK$74.1m of debt, up from HK$68.2m a year ago. Click the image for more detail. However, it also had HK$6.26m in cash, and so its net debt is HK$67.9m.

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

Zooming in on the latest balance sheet data, we can see that China Environmental Resources Group had liabilities of HK$118.9m due within 12 months and liabilities of HK$123.5m due beyond that. On the other hand, it had cash of HK$6.26m and HK$45.0m worth of receivables due within a year. So it has liabilities totalling HK$191.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$93.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, China Environmental Resources Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. 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$84m, which is a fall of 9.4%. That's not what we would hope to see.

Caveat Emptor

Importantly, China Environmental Resources Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$38m 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. It's fair to say the loss of HK$35m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. To that end, you should learn about the 2 warning signs we've spotted with China Environmental Resources Group (including 1 which is significant) .

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.