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.' 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 Weigang Environmental Technology Holding Group Limited (HKG:1845) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.
How Much Debt Does Weigang Environmental Technology Holding Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Weigang Environmental Technology Holding Group had CN¥55.7m of debt, an increase on CN¥26.6m, over one year. But on the other hand it also has CN¥87.4m in cash, leading to a CN¥31.6m net cash position.
A Look At Weigang Environmental Technology Holding Group's Liabilities
We can see from the most recent balance sheet that Weigang Environmental Technology Holding Group had liabilities of CN¥330.4m falling due within a year, and liabilities of CN¥13.2m due beyond that. Offsetting this, it had CN¥87.4m in cash and CN¥535.2m in receivables that were due within 12 months. So it can boast CN¥278.9m more liquid assets than total liabilities.
This luscious liquidity implies that Weigang Environmental Technology Holding Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Weigang Environmental Technology Holding Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Weigang Environmental Technology Holding Group's earnings that will influence how the balance sheet holds up in the future. 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 Weigang Environmental Technology Holding Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
So How Risky Is Weigang Environmental Technology Holding Group?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Weigang Environmental Technology Holding Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥103m of cash and made a loss of CN¥11m. Given it only has net cash of CN¥31.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Weigang Environmental Technology Holding Group is showing 1 warning sign in our investment analysis , you should know about...
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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