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.' 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. We note that Kingenta Ecological Engineering Group Co., Ltd. (SZSE:002470) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Kingenta Ecological Engineering Group's Net Debt?
The image below, which you can click on for greater detail, shows that Kingenta Ecological Engineering Group had debt of CN¥4.58b at the end of March 2024, a reduction from CN¥4.91b over a year. However, it also had CN¥1.01b in cash, and so its net debt is CN¥3.57b.
How Strong Is Kingenta Ecological Engineering Group's Balance Sheet?
The latest balance sheet data shows that Kingenta Ecological Engineering Group had liabilities of CN¥7.16b due within a year, and liabilities of CN¥2.21b falling due after that. Offsetting these obligations, it had cash of CN¥1.01b as well as receivables valued at CN¥879.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.49b.
When you consider that this deficiency exceeds the company's CN¥5.29b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Over 12 months, Kingenta Ecological Engineering Group made a loss at the EBIT level, and saw its revenue drop to CN¥7.8b, which is a fall of 21%. That makes us nervous, to say the least.
Caveat Emptor
While Kingenta Ecological Engineering Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥309m. 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¥904m didn't encourage us either; we'd like to see a profit. 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 example, we've discovered 1 warning sign for Kingenta Ecological Engineering Group that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.