Does China Environmental Energy Investment (HKG:986) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, China Environmental Energy Investment Limited (HKG:986) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does China Environmental Energy Investment Carry?

The image below, which you can click on for greater detail, shows that at September 2024 China Environmental Energy Investment had debt of HK$32.7m, up from HK$26.0m in one year. And it doesn't have much cash, so its net debt is about the same.

A Look At China Environmental Energy Investment's Liabilities

The latest balance sheet data shows that China Environmental Energy Investment had liabilities of HK$49.5m due within a year, and liabilities of HK$15.2m falling due after that. Offsetting these obligations, it had cash of HK$335.0k as well as receivables valued at HK$92.8m due within 12 months. So it actually has HK$28.4m more liquid assets than total liabilities.

This surplus liquidity suggests that China Environmental Energy Investment's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Environmental Energy Investment 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.

See our latest analysis for China Environmental Energy Investment

Over 12 months, China Environmental Energy Investment made a loss at the EBIT level, and saw its revenue drop to HK$61m, which is a fall of 3.8%. That's not what we would hope to see.

Caveat Emptor

Importantly, China Environmental Energy Investment had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$6.6m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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 Energy Investment has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.