Is China Environmental Resources Group (HKG:1130) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies China Environmental Resources Group Limited (HKG:1130) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China Environmental Resources Group

How Much Debt Does China Environmental Resources Group Carry?

As you can see below, at the end of December 2021, China Environmental Resources Group had HK$69.7m of debt, up from HK$32.2m a year ago. Click the image for more detail. However, it also had HK$7.64m in cash, and so its net debt is HK$62.1m.

A Look At China Environmental Resources Group's Liabilities

We can see from the most recent balance sheet that China Environmental Resources Group had liabilities of HK$113.4m falling due within a year, and liabilities of HK$139.1m due beyond that. On the other hand, it had cash of HK$7.64m and HK$71.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$173.2m.

This deficit casts a shadow over the HK$95.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, China Environmental Resources Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is China Environmental Resources 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.

In the last year China Environmental Resources Group wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to HK$83m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, China Environmental Resources Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$17m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through HK$14m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for China Environmental Resources Group you should be aware of, and 1 of them is potentially serious.

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.