We Think China Environmental Resources Group (HKG:1130) Has A Fair Chunk Of Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies China Environmental Resources Group Limited (HKG:1130) makes use of debt. But the real question is whether this debt is making the company risky.

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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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is China Environmental Resources Group's Net Debt?

The image below, which you can click on for greater detail, shows that China Environmental Resources Group had debt of HK$68.1m at the end of June 2025, a reduction from HK$84.8m over a year. However, it does have HK$2.06m in cash offsetting this, leading to net debt of about HK$66.0m.

A Look At China Environmental Resources Group's Liabilities

According to the last reported balance sheet, China Environmental Resources Group had liabilities of HK$118.0m due within 12 months, and liabilities of HK$109.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$2.06m as well as receivables valued at HK$32.5m due within 12 months. So its liabilities total HK$192.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$239.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Check out our latest analysis for China Environmental Resources Group

Over 12 months, China Environmental Resources Group made a loss at the EBIT level, and saw its revenue drop to HK$61m, which is a fall of 27%. That makes us nervous, to say the least.

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). To be specific the EBIT loss came in at HK$23m. 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. However, it doesn't help that it burned through HK$10m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 2 warning signs we've spotted with China Environmental Resources Group (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.