Auditors Have Doubts About Zheneng Jinjiang Environment Holding (SGX:BWM)

The harsh reality for Zheneng Jinjiang Environment Holding Company Limited (SGX:BWM) shareholders is that its auditors, PricewaterhouseCoopers LLP, expressed doubts about its ability to continue as a going concern, in its reported results to December 2020. This means that, based on the financial results to that date, the company arguably should raise capital, or otherwise strengthen the balance sheet, as soon as possible.

Given its situation, it may not be in a good position to raise capital on favorable terms. So shareholders should absolutely be taking a close look at how risky the balance sheet is. The biggest concern we would have is the company's debt, since its lenders might force the company into administration if it cannot repay them.

See our latest analysis for Zheneng Jinjiang Environment Holding

How Much Debt Does Zheneng Jinjiang Environment Holding Carry?

As you can see below, at the end of December 2020, Zheneng Jinjiang Environment Holding had CN¥8.68b of debt, up from CN¥7.46b a year ago. Click the image for more detail. However, it also had CN¥361.3m in cash, and so its net debt is CN¥8.32b.

A Look At Zheneng Jinjiang Environment Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Zheneng Jinjiang Environment Holding had liabilities of CN¥4.65b due within 12 months and liabilities of CN¥7.01b due beyond that. On the other hand, it had cash of CN¥361.3m and CN¥2.86b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.44b.

The deficiency here weighs heavily on the CN¥4.08b 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, Zheneng Jinjiang Environment Holding would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Zheneng Jinjiang Environment Holding shareholders face the double whammy of a high net debt to EBITDA ratio (7.6), and fairly weak interest coverage, since EBIT is just 1.9 times the interest expense. The debt burden here is substantial. More concerning, Zheneng Jinjiang Environment Holding saw its EBIT drop by 5.0% in the last twelve months. If that earnings trend continues the company will face an uphill battle to pay off its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zheneng Jinjiang Environment Holding 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Zheneng Jinjiang Environment Holding burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Zheneng Jinjiang Environment Holding's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And even its interest cover fails to inspire much confidence. We think the chances that Zheneng Jinjiang Environment Holding has too much debt a very significant. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. While some investors may specialize in these sort of situations, it's simply too risky and complicated for us to want to invest in a company after an auditor has expressed doubts about its ability to continue as a going concern. Our preference is to invest in companies that always make sure the auditor has confidence that the company will continue as a going concern. 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. For example Zheneng Jinjiang Environment Holding has 4 warning signs (and 3 which don't sit too well with us) we think you should know about.

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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