Is Zhejiang Tengy Environmental Technology (HKG:1527) 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.' 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. We note that Zhejiang Tengy Environmental Technology Co., Ltd (HKG:1527) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Zhejiang Tengy Environmental Technology

How Much Debt Does Zhejiang Tengy Environmental Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Zhejiang Tengy Environmental Technology had CN¥85.0m of debt, an increase on CN¥68.7m, over one year. However, it does have CN¥293.4m in cash offsetting this, leading to net cash of CN¥208.4m.

How Healthy Is Zhejiang Tengy Environmental Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Tengy Environmental Technology had liabilities of CN¥704.7m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of CN¥293.4m and CN¥711.8m worth of receivables due within a year. So it can boast CN¥300.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Zhejiang Tengy Environmental Technology's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Zhejiang Tengy Environmental Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhejiang Tengy Environmental Technology 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.

In the last year Zhejiang Tengy Environmental Technology had a loss before interest and tax, and actually shrunk its revenue by 51%, to CN¥449m. That makes us nervous, to say the least.

So How Risky Is Zhejiang Tengy Environmental Technology?

While Zhejiang Tengy Environmental Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥51m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Zhejiang Tengy Environmental Technology (1 can't be ignored!) that you should be aware of before investing here.

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.