Does Dongjiang Environmental (HKG:895) Have A Healthy Balance Sheet?

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 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. Importantly, Dongjiang Environmental Company Limited (HKG:895) does carry debt. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Dongjiang Environmental's Debt?

The chart below, which you can click on for greater detail, shows that Dongjiang Environmental had CN¥5.91b in debt in March 2025; about the same as the year before. However, it does have CN¥1.40b in cash offsetting this, leading to net debt of about CN¥4.51b.

A Look At Dongjiang Environmental's Liabilities

The latest balance sheet data shows that Dongjiang Environmental had liabilities of CN¥3.51b due within a year, and liabilities of CN¥3.78b falling due after that. Offsetting this, it had CN¥1.40b in cash and CN¥1.29b in receivables that were due within 12 months. So its liabilities total CN¥4.61b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥4.93b, so it does suggest shareholders should keep an eye on Dongjiang Environmental's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dongjiang Environmental 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.

View our latest analysis for Dongjiang Environmental

Over 12 months, Dongjiang Environmental made a loss at the EBIT level, and saw its revenue drop to CN¥3.4b, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

Not only did Dongjiang Environmental's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥505m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥795m into a profit. So we do think this stock is quite risky. 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 Dongjiang Environmental , 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.