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Howard Marks put it well when he said, “The possibility of permanent loss is the risk that worries me… and that worries every practical investor I know.” When we think about how risky a company is, we always like to look at its level of debt, since excessive debt can lead to ruin. We find that China Boqi Environmental (Holding) Co., Ltd. (HKG:2377) has debt on its balance sheet. But the bigger question is: how much risk does that debt bring?

Why is debt risky?

Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either through free cash flow or by raising capital at an attractive price. A key part of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that the company must raise new equity at a low price, permanently diluting shareholders’ interest. Of course, debt can be an important tool for companies, especially capital-intensive companies. When we think about a company’s use of debt, we first consider cash and debt together.

Check out our latest analysis for China Boqi Environmental (Holding).

How much debt does China Boqi Environmental (Holding) have?

You can click on the chart below to see the historical numbers, but it shows that China Boqi Environmental (Holding) had CN¥216.3 million in debt as of December 2023, an increase of CN¥174.1 million from one year ago. However, to offset this, the company also has CN¥590.6 million in cash, meaning it has CN¥374.3 million net cash.

A look at the liabilities of China Boqi Environmental (Holding)

If we take a closer look at the most recent balance sheet data, we can see that China Boqi Environmental (Holding) had liabilities of CN¥1.80 billion due within 12 months and accounts payable of CN¥152.9 million due beyond that. On the other hand, the company had cash of CN¥590.6 million and accounts receivable worth CN¥1.95 billion due within a year. So the company actually has CN¥589.2 million. more Liquid assets are greater than total liabilities.

This excess liquidity is a clear indication that China Boqi Environmental (Holding)’s balance sheet is almost as strong as Fort Knox. With that in mind, we believe the balance sheet is as strong as an ox. Simply put, the fact that China Boqi Environmental (Holding) has more cash than debt is arguably a good indication that the company can safely manage its debt.

The good news is that China Boqi Environmental (Holding) has grown its EBIT by 8.7% over twelve months, which should allay any concerns about debt repayment. The balance sheet is clearly the area to focus on when analysing debt. But it’s China Boqi Environmental (Holding)’s earnings that will influence how the balance sheet performs in the future. So when looking at debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.

However, our final consideration is also important because a company can’t pay off its debt with accounting profits; it needs cold hard cash. While China Boqi Environmental (Holding) 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 understand how quickly it’s building (or burning through) that cash pile. Over the last three years, China Boqi Environmental (Holding) has burned through a lot of cash. While that may be the result of spending on growth, it does make the debt far riskier.

Summarize

While it’s always useful to examine a company’s debt, in this case China Boqi Environmental (Holding) has CN¥374.3m in net cash and a decent balance sheet. In addition, the company was able to grow its EBIT by 8.7% over the last twelve months. So, does China Boqi Environmental (Holding)’s debt pose a risk? To us, that doesn’t seem to be the case. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks can be found on the balance sheet – quite the opposite. For example, we found that: 3 warning signals for China Boqi Environmental (Holding) (1 makes us a little uncomfortable) you should know.

Ultimately, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% freeat the moment.

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This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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