Is Changmao Biochemical Engineering (HKG:954) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Changmao Biochemical Engineering Company Limited (HKG:954) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Changmao Biochemical Engineering Carry?

As you can see below, Changmao Biochemical Engineering had CN¥534.9m of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥66.5m in cash, and so its net debt is CN¥468.4m.

How Healthy Is Changmao Biochemical Engineering's Balance Sheet?

We can see from the most recent balance sheet that Changmao Biochemical Engineering had liabilities of CN¥584.5m falling due within a year, and liabilities of CN¥87.9m due beyond that. Offsetting these obligations, it had cash of CN¥66.5m as well as receivables valued at CN¥84.9m due within 12 months. So it has liabilities totalling CN¥521.0m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥157.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Changmao Biochemical Engineering would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Changmao Biochemical Engineering'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.

See our latest analysis for Changmao Biochemical Engineering

In the last year Changmao Biochemical Engineering had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥543m. We would much prefer see growth.

Caveat Emptor

While Changmao Biochemical Engineering's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥60m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CN¥2.4m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Changmao Biochemical Engineering (2 can't be ignored) 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.