Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, CECEP Environmental Protection Equipment Co.,Ltd. (SZSE:300140) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for CECEP Environmental Protection EquipmentLtd

How Much Debt Does CECEP Environmental Protection EquipmentLtd Carry?

The image below, which you can click on for greater detail, shows that CECEP Environmental Protection EquipmentLtd had debt of CN¥276.5m at the end of March 2023, a reduction from CN¥488.9m over a year. However, because it has a cash reserve of CN¥231.5m, its net debt is less, at about CN¥45.0m.

How Strong Is CECEP Environmental Protection EquipmentLtd's Balance Sheet?

The latest balance sheet data shows that CECEP Environmental Protection EquipmentLtd had liabilities of CN¥1.16b due within a year, and liabilities of CN¥35.0m falling due after that. On the other hand, it had cash of CN¥231.5m and CN¥1.08b worth of receivables due within a year. So it actually has CN¥115.6m more liquid assets than total liabilities.

This state of affairs indicates that CECEP Environmental Protection EquipmentLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥22.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, CECEP Environmental Protection EquipmentLtd has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is CECEP Environmental Protection EquipmentLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CECEP Environmental Protection EquipmentLtd had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥893m. That's not what we would hope to see.

Caveat Emptor

Not only did CECEP Environmental Protection EquipmentLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥72m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. 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 instance, we've identified 3 warning signs for CECEP Environmental Protection EquipmentLtd (2 are concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.