These 4 Measures Indicate That China Boqi Environmental (Holding) (HKG:2377) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that China Boqi Environmental (Holding) Co., Ltd. (HKG:2377) does use debt in its business. 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Boqi Environmental (Holding)

What Is China Boqi Environmental (Holding)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 China Boqi Environmental (Holding) had CN¥167.0m of debt, an increase on CN¥71.6m, over one year. However, it does have CN¥522.7m in cash offsetting this, leading to net cash of CN¥355.7m.

A Look At China Boqi Environmental (Holding)'s Liabilities

Zooming in on the latest balance sheet data, we can see that China Boqi Environmental (Holding) had liabilities of CN¥1.45b due within 12 months and liabilities of CN¥265.8m due beyond that. On the other hand, it had cash of CN¥522.7m and CN¥1.33b worth of receivables due within a year. So it can boast CN¥135.4m more liquid assets than total liabilities.

This short term liquidity is a sign that China Boqi Environmental (Holding) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China Boqi Environmental (Holding) boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, China Boqi Environmental (Holding)'s EBIT dived 10%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Boqi Environmental (Holding)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While China Boqi Environmental (Holding) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, China Boqi Environmental (Holding) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Boqi Environmental (Holding) has net cash of CN¥355.7m, as well as more liquid assets than liabilities. So we are not troubled with China Boqi Environmental (Holding)'s debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - China Boqi Environmental (Holding) has 2 warning signs we think you should be aware of.

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.