David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Moon Environment Technology Co.,Ltd. (SZSE:000811) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Moon Environment TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that Moon Environment TechnologyLtd had debt of CN¥925.6m at the end of September 2024, a reduction from CN¥1.06b over a year. But it also has CN¥3.05b in cash to offset that, meaning it has CN¥2.12b net cash.

A Look At Moon Environment TechnologyLtd's Liabilities

According to the last reported balance sheet, Moon Environment TechnologyLtd had liabilities of CN¥4.49b due within 12 months, and liabilities of CN¥824.0m due beyond 12 months. Offsetting this, it had CN¥3.05b in cash and CN¥2.77b in receivables that were due within 12 months. So it actually has CN¥498.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Moon Environment TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Moon Environment TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Moon Environment TechnologyLtd saw its EBIT drop by 7.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Moon Environment TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Moon Environment TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Moon Environment TechnologyLtd recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Moon Environment TechnologyLtd has CN¥2.12b in net cash and a decent-looking balance sheet. So we are not troubled with Moon Environment TechnologyLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Moon Environment TechnologyLtd 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.

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.