The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Kingenta Ecological Engineering Group Co., Ltd. (SZSE:002470) makes use of debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Kingenta Ecological Engineering Group
What Is Kingenta Ecological Engineering Group's Debt?
The chart below, which you can click on for greater detail, shows that Kingenta Ecological Engineering Group had CN¥4.87b in debt in September 2023; about the same as the year before. However, it also had CN¥1.66b in cash, and so its net debt is CN¥3.21b.
How Strong Is Kingenta Ecological Engineering Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Kingenta Ecological Engineering Group had liabilities of CN¥8.32b due within 12 months and liabilities of CN¥1.91b due beyond that. Offsetting this, it had CN¥1.66b in cash and CN¥1.52b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.06b.
When you consider that this deficiency exceeds the company's CN¥5.95b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kingenta Ecological Engineering Group'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.
In the last year Kingenta Ecological Engineering Group had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to CN¥9.0b. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Kingenta Ecological Engineering Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥529m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥776m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Kingenta Ecological Engineering Group that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to 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 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.
