Is China Dredging Environment Protection Holdings (HKG:871) A Risky Investment?

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. As with many other companies China Dredging Environment Protection Holdings Limited (HKG:871) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Dredging Environment Protection Holdings

How Much Debt Does China Dredging Environment Protection Holdings Carry?

As you can see below, China Dredging Environment Protection Holdings had CN¥480.8m of debt at June 2023, down from CN¥543.6m a year prior. On the flip side, it has CN¥53.0m in cash leading to net debt of about CN¥427.8m.

A Look At China Dredging Environment Protection Holdings' Liabilities

The latest balance sheet data shows that China Dredging Environment Protection Holdings had liabilities of CN¥772.9m due within a year, and liabilities of CN¥207.6m falling due after that. Offsetting these obligations, it had cash of CN¥53.0m as well as receivables valued at CN¥395.0m due within 12 months. So its liabilities total CN¥532.5m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥94.6m 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Dredging Environment Protection 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.

Over 12 months, China Dredging Environment Protection Holdings reported revenue of CN¥433m, which is a gain of 4.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months China Dredging Environment Protection Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥86m 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. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥328m in the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for China Dredging Environment Protection Holdings 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.