Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT Co., LTD. (SZSE:000826) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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 examine debt levels, we first consider both cash and debt levels, together.
What Is TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT's Debt?
As you can see below, at the end of September 2024, TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT had CN¥8.64b of debt, up from CN¥8.11b a year ago. Click the image for more detail. However, it does have CN¥608.4m in cash offsetting this, leading to net debt of about CN¥8.03b.
A Look At TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT's Liabilities
We can see from the most recent balance sheet that TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT had liabilities of CN¥9.29b falling due within a year, and liabilities of CN¥6.26b due beyond that. Offsetting this, it had CN¥608.4m in cash and CN¥5.10b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.84b.
This deficit casts a shadow over the CN¥4.38b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT will need earnings to service that debt. 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.
Over 12 months, TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT made a loss at the EBIT level, and saw its revenue drop to CN¥5.3b, which is a fall of 5.6%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥258m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥2.4b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt 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've spotted 2 warning signs for TUS ENVIRONMENTAL SCIENCE AND TECHNOLOGY DEVELOPMENT you should be aware of, and 1 of them doesn't sit too well with us.
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.
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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.
