Is China Dredging Environment Protection Holdings (HKG:871) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 China Dredging Environment Protection Holdings Limited (HKG:871) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China Dredging Environment Protection Holdings

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

The image below, which you can click on for greater detail, shows that China Dredging Environment Protection Holdings had debt of CN¥480.8m at the end of June 2023, a reduction from CN¥543.6m over a year. 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

According to the last reported balance sheet, China Dredging Environment Protection Holdings had liabilities of CN¥772.9m due within 12 months, and liabilities of CN¥207.6m due beyond 12 months. Offsetting this, it had CN¥53.0m in cash and CN¥395.0m in receivables that were 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¥68.9m 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. At the end of the day, China Dredging Environment Protection Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months China Dredging Environment Protection Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥86m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥328m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Case in point: We've spotted 2 warning signs for China Dredging Environment Protection Holdings you should be aware of, and 1 of them shouldn't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.