Is Weigang Environmental Technology Holding Group (HKG:1845) Using Debt In A Risky Way?

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.' 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. We note that Weigang Environmental Technology Holding Group Limited (HKG:1845) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Weigang Environmental Technology Holding Group

What Is Weigang Environmental Technology Holding Group's Debt?

As you can see below, at the end of June 2022, Weigang Environmental Technology Holding Group had CN¥48.2m of debt, up from CN¥38.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥147.3m in cash, so it actually has CN¥99.1m net cash.

How Healthy Is Weigang Environmental Technology Holding Group's Balance Sheet?

The latest balance sheet data shows that Weigang Environmental Technology Holding Group had liabilities of CN¥265.5m due within a year, and liabilities of CN¥8.92m falling due after that. Offsetting this, it had CN¥147.3m in cash and CN¥382.1m in receivables that were due within 12 months. So it can boast CN¥255.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Weigang Environmental Technology Holding Group'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. Simply put, the fact that Weigang Environmental Technology Holding Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Weigang Environmental Technology Holding 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.

Over 12 months, Weigang Environmental Technology Holding Group made a loss at the EBIT level, and saw its revenue drop to CN¥519m, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Weigang Environmental Technology Holding Group?

While Weigang Environmental Technology Holding Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥28m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. 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. We've identified 2 warning signs with Weigang Environmental Technology Holding Group (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.