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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Weigang Environmental Technology Holding Group

How Much Debt Does Weigang Environmental Technology Holding Group Carry?

As you can see below, Weigang Environmental Technology Holding Group had CN¥43.1m of debt at June 2023, down from CN¥48.2m a year prior. However, it does have CN¥111.6m in cash offsetting this, leading to net cash of CN¥68.5m.

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

We can see from the most recent balance sheet that Weigang Environmental Technology Holding Group had liabilities of CN¥219.5m falling due within a year, and liabilities of CN¥8.93m due beyond that. Offsetting this, it had CN¥111.6m in cash and CN¥351.4m in receivables that were due within 12 months. So it actually has CN¥234.6m 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. 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! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Weigang Environmental Technology Holding Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Weigang Environmental Technology Holding Group had a loss before interest and tax, and actually shrunk its revenue by 55%, to CN¥235m. To be frank that doesn't bode well.

So How Risky Is Weigang Environmental Technology Holding Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Weigang Environmental Technology Holding Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥29m and booked a CN¥44m accounting loss. Given it only has net cash of CN¥68.5m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Weigang Environmental Technology Holding Group (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.