Some people say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said, “Volatility is not synonymous with risk.” So when you think about the risk of a particular stock, it might be obvious that you need to consider debt. Because too much debt can sink a company. Points to keep in mind are: China Dredging Environmental Protection Holdings Co., Ltd. (HKG:871) has debt on its balance sheet. But the more important question is how much risk that debt creates.
What risks does debt pose?
Debt supports a company until the company has difficulty paying it back with new capital or free cash flow. If the situation gets too bad, lenders may take control of your business. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. Of course, debt can be an important tool in business, especially in capital-heavy businesses. When investigating debt levels, we first consider both cash and debt levels together.
See our latest analysis for China Dredging Environmental Protection Holdings.
What is China Dredging Environmental Protection Holdings’ net debt?
Click on the image below for more details, but China Dredging Environmental Protection Holdings had debt of CA$480.8m at the end of June 2023, down from CA$543.6m over one year. You can see. On the other hand, it had cash of CA$53.0m, leading to its net debt of approximately CA$427.8m.
Looking back at China Dredging Environmental Protection Holdings’ debt
According to its last reported balance sheet, China Dredging Environmental Protection Holdings had liabilities of CA$772.9m due within 12 months, and liabilities of CA$207.6m due beyond 12 months. I have a dollar debt. Offsetting this, it had cash of CA$53 million and receivables of CA$395 million due within 12 months. So its total liabilities outweigh the sum of its cash and short-term receivables by CA$532.5m.
The flaws here weigh on the C$68.9 million company itself, like a child struggling under the weight of a giant backpack full of books, sports equipment, and a trumpet. So we will definitely be keeping a close eye on its balance sheet. After all, if creditors demand repayment, China Dredging Environmental Protection Holdings will likely need a major recapitalization. There’s no question that we learn most about debt from the balance sheet. However, it is China Dredging Environmental Protection Holdings’ earnings that will influence how its balance sheet holds up in the future. So if you are keen to discover more about the company’s earnings, it might be worth checking this graph of its long-term earnings trend.
China Dredging Environmental Protection Holdings reported revenue of C$433 million, an increase of 4.9% in the 12-month period, but did not report profit before interest and tax. Its growth rate is a little slow for our tastes, but we need all types to create a world.
Buyer’s responsibility burden
Over the last twelve months, China Dredging Environmental Protection Holdings made an earnings before interest and tax (EBIT) loss. The EBIT loss was a whopping CN Yen 86 million. Combine this with the all-important balance sheet debt mentioned above, and we’re basically, for lack of a better word, wary of it. Indeed, the company may have a great story about how it is moving towards a bright future. However, in reality, its current assets are lower than its liabilities, and it lost CAD 328 million last year. So we’re not too excited about owning this stock. That’s too risky for us. There’s no question 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 discovered 2 warning signs for China Dredging Environmental Protection Holdings You should know and not one of them should be ignored.
Of course, if you’re the type of investor who prefers buying stocks without taking on debt, then don’t hesitate and 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 using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.