Health Check: How Prudently Does China Environmental Technology and Bioenergy Holdings (HKG:1237) Use Debt?

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. As with many other companies China Environmental Technology and Bioenergy Holdings Limited (HKG:1237) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Environmental Technology and Bioenergy Holdings

What Is China Environmental Technology and Bioenergy Holdings's Debt?

The image below, which you can click on for greater detail, shows that China Environmental Technology and Bioenergy Holdings had debt of CN¥54.0m at the end of December 2022, a reduction from CN¥58.4m over a year. However, it does have CN¥295.2m in cash offsetting this, leading to net cash of CN¥241.3m.

How Strong Is China Environmental Technology and Bioenergy Holdings' Balance Sheet?

According to the last reported balance sheet, China Environmental Technology and Bioenergy Holdings had liabilities of CN¥129.5m due within 12 months, and liabilities of CN¥6.69m due beyond 12 months. Offsetting these obligations, it had cash of CN¥295.2m as well as receivables valued at CN¥57.4m due within 12 months. So it actually has CN¥216.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that China Environmental Technology and Bioenergy Holdings' 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, China Environmental Technology and Bioenergy Holdings 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 you can't view debt in total isolation; since China Environmental Technology and Bioenergy Holdings 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.

In the last year China Environmental Technology and Bioenergy Holdings had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥465m. To be frank that doesn't bode well.

So How Risky Is China Environmental Technology and Bioenergy Holdings?

While China Environmental Technology and Bioenergy Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥198m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how 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. Case in point: We've spotted 3 warning signs for China Environmental Technology and Bioenergy Holdings you should be aware of, and 2 of them are significant.

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.