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. We note that Heilongjiang Interchina Water Treatment Co.,Ltd (SHSE:600187) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Heilongjiang Interchina Water TreatmentLtd Carry?
You can click the graphic below for the historical numbers, but it shows that Heilongjiang Interchina Water TreatmentLtd had CN¥152.6m of debt in September 2023, down from CN¥186.0m, one year before. But on the other hand it also has CN¥503.9m in cash, leading to a CN¥351.3m net cash position.
A Look At Heilongjiang Interchina Water TreatmentLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Heilongjiang Interchina Water TreatmentLtd had liabilities of CN¥182.0m due within 12 months and liabilities of CN¥242.9m due beyond that. On the other hand, it had cash of CN¥503.9m and CN¥426.5m worth of receivables due within a year. So it actually has CN¥505.4m more liquid assets than total liabilities.
This surplus suggests that Heilongjiang Interchina Water TreatmentLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Heilongjiang Interchina Water TreatmentLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Heilongjiang Interchina Water TreatmentLtd'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.
Over 12 months, Heilongjiang Interchina Water TreatmentLtd made a loss at the EBIT level, and saw its revenue drop to CN¥239m, which is a fall of 31%. That makes us nervous, to say the least.
So How Risky Is Heilongjiang Interchina Water TreatmentLtd?
While Heilongjiang Interchina Water TreatmentLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥89m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Heilongjiang Interchina Water TreatmentLtd (including 1 which is significant) .
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.