Is China Environmental Technology and Bioenergy Holdings (HKG:1237) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that China Environmental Technology and Bioenergy Holdings Limited (HKG:1237) does use debt in its business. But is this debt a concern to shareholders?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 at June 2023 China Environmental Technology and Bioenergy Holdings had debt of CN¥88.2m, up from CN¥14.4m in one year. However, it does have CN¥301.6m in cash offsetting this, leading to net cash of CN¥213.4m.

A Look At China Environmental Technology and Bioenergy Holdings' Liabilities

We can see from the most recent balance sheet that China Environmental Technology and Bioenergy Holdings had liabilities of CN¥173.2m falling due within a year, and liabilities of CN¥5.51m due beyond that. Offsetting these obligations, it had cash of CN¥301.6m as well as receivables valued at CN¥73.3m due within 12 months. So it actually has CN¥196.2m more liquid assets than total liabilities.

This surplus strongly suggests that China Environmental Technology and Bioenergy Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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! There's no doubt that we learn most about debt from the balance sheet. But it is China Environmental Technology and Bioenergy Holdings's earnings that will influence how the balance sheet holds up in the future. 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 48%, to CN¥344m. That makes us nervous, to say the least.

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¥24m. 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. 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 China Environmental Technology and Bioenergy Holdings has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.