Does China Dredging Environment Protection Holdings (HKG:871) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies China Dredging Environment Protection Holdings Limited (HKG:871) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Dredging Environment Protection Holdings

What Is China Dredging Environment Protection Holdings's Net Debt?

As you can see below, China Dredging Environment Protection Holdings had CN¥455.4m of debt at June 2022, down from CN¥603.8m a year prior. On the flip side, it has CN¥35.9m in cash leading to net debt of about CN¥419.6m.

How Healthy Is China Dredging Environment Protection Holdings' Balance Sheet?

According to the last reported balance sheet, China Dredging Environment Protection Holdings had liabilities of CN¥784.4m due within 12 months, and liabilities of CN¥262.6m due beyond 12 months. Offsetting this, it had CN¥35.9m in cash and CN¥554.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥456.6m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥156.8m 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, China Dredging Environment Protection Holdings 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 you can't view debt in total isolation; since China Dredging Environment Protection Holdings 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.

In the last year China Dredging Environment Protection Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to CN¥413m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, China Dredging Environment Protection Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥8.6m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. 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 lost CN¥163m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. Be aware that China Dredging Environment Protection Holdings is showing 3 warning signs in our investment analysis , and 1 of those is significant...

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.