Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies China Environmental Technology and Bioenergy Holdings Limited (HKG:1237) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does China Environmental Technology and Bioenergy Holdings Carry?
As you can see below, China Environmental Technology and Bioenergy Holdings had CN¥45.2m of debt at June 2019, down from CN¥194.3m a year prior. However, its balance sheet shows it holds CN¥51.6m in cash, so it actually has CN¥6.45m net cash.
How Strong Is China Environmental Technology and Bioenergy Holdings's Balance Sheet?
We can see from the most recent balance sheet that China Environmental Technology and Bioenergy Holdings had liabilities of CN¥105.6m falling due within a year, and liabilities of CN¥20.4m due beyond that. Offsetting this, it had CN¥51.6m in cash and CN¥107.5m in receivables that were due within 12 months. So it can boast CN¥33.1m more liquid assets than total liabilities.
This surplus liquidity suggests that China Environmental Technology and Bioenergy Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that China Environmental Technology and Bioenergy Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is China Environmental Technology and Bioenergy 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 Environmental Technology and Bioenergy Holdings reported revenue of CN¥705m, which is a gain of 24%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is China Environmental Technology and Bioenergy Holdings?
Although China Environmental Technology and Bioenergy Holdings had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of CN¥143m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 24% is a good sign. We'd see further strong growth as an optimistic indication. For riskier companies like China Environmental Technology and Bioenergy Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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