David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that China Dredging Environment Protection Holdings Limited (HKG: 871) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for China Dredging Environment Protection Holdings
What is the debt of China Dredging Environment Protection Holdings?
You can click on the graph below for historical figures, but it shows China Dredging Environment Protection Holdings owed CN 603.8 million in June 2021, up from CN 769.1 million a year earlier. However, given that it has a cash reserve of CN 68.6 million, its net debt is less, at around CN 535.2 million.
A look at China’s dredging liabilities for environmental protection
According to the latest published balance sheet, China Dredging Environment Protection Holdings had liabilities of CNS 896.2 million due within 12 months and CN liabilities of CN 262.6 million due beyond 12 months. In return, he had CN 68.6 million in cash and CN 509.8 million in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by CN 580.3 million.
The lack here weighs heavily on the CN 191.7million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. . We would therefore monitor its record closely, without a doubt. Ultimately, China Dredging Environment Protection Holdings would likely need a major recapitalization if its creditors demanded repayment. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of China Dredging Environment Protection Holdings that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
In the past year, China Dredging Environment Protection Holdings has not been profitable in EBIT level, but managed to increase its revenue by 7.3%, to CN 313 million. This rate of growth is a bit slow for our taste, but it takes all types to make a world.
It is important to note that China Dredging Environment Protection Holdings recorded a loss of profit before interest and taxes (EBIT) in the past year. Its EBIT loss was a huge CN ¥ 239m. The combination of this information with the significant liabilities that we have already mentioned makes us very hesitant to say the least about this stock. That said, the company may change course. Still, we wouldn’t bet on that given that he has lost CNN 284 million in the past twelve months and doesn’t have a lot of cash. So while it is unwise to assume that the business will fail, we believe it is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 4 warning signs we spotted with China Dredging Environment Protection Holdings (including 2 that should not be ignored).
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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