China Environmental Energy Investment (HKG:986) Is Making Moderate Use Of 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.' 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 note that China Environmental Energy Investment Limited (HKG:986) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for China Environmental Energy Investment

How Much Debt Does China Environmental Energy Investment Carry?

The image below, which you can click on for greater detail, shows that at September 2023 China Environmental Energy Investment had debt of HK$26.0m, up from HK$17.7m in one year. On the flip side, it has HK$9.73m in cash leading to net debt of about HK$16.3m.

How Strong Is China Environmental Energy Investment's Balance Sheet?

The latest balance sheet data shows that China Environmental Energy Investment had liabilities of HK$52.2m due within a year, and liabilities of HK$10.9m falling due after that. Offsetting this, it had HK$9.73m in cash and HK$99.0m in receivables that were due within 12 months. So it can boast HK$45.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that China Environmental Energy Investment's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Environmental Energy Investment'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.

In the last year China Environmental Energy Investment had a loss before interest and tax, and actually shrunk its revenue by 39%, to HK$64m. To be frank that doesn't bode well.

Caveat Emptor

Not only did China Environmental Energy Investment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$12m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for China Environmental Energy Investment that you should be aware of before investing here.

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.