David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Weigang Environmental Technology Holding Group Limited (HKG:1845) uses debt. But does this debt worry shareholders?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Weigang Environmental Technology Holding Group
How much debt does Weigang Environmental Technology Holding Group have?
The graph below, which you can click on for more details, shows that Weigang Environmental Technology Holding Group had a debt of 53.7 million yen in December 2021; about the same as the previous year. However, he has 79.2 million Canadian yen in cash to offset this, which translates to a net cash of 25.5 million Canadian yen.
How healthy is Weigang Environmental Technology Holding Group’s balance sheet?
According to the latest published balance sheet, Weigang Environmental Technology Holding Group had liabilities of 290.5 million yen due within 12 months and liabilities of 2.94 million yen due beyond 12 months. In compensation for these obligations, it had cash of 79.2 million yen as well as receivables valued at 488.0 million yen due within 12 months. He can therefore boast of having 273.7 million yen more in liquid assets than total Passives.
This luscious liquidity means Weigang Environmental Technology Holding Group’s balance sheet is as strong as a giant sequoia. From this perspective, lenders should feel as secure as the beloved of a black belt karate master. In short, Weigang Environmental Technology Holding Group has net cash, so it’s fair to say that it doesn’t have heavy debt! The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Weigang Environmental Technology Holding Group will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Last year, Weigang Environmental Technology Holding Group was not profitable in terms of EBIT, but managed to increase its revenue by 4.6%, to 562 million yen. This rate of growth is a little slow for our liking, but it takes all types to make a world.
So how risky is Weigang Environmental Technology Holding Group?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And last year, Weigang Environmental Technology Holding Group posted a loss in earnings before interest and taxes (EBIT), actually. And during the same period, it recorded a negative free cash outflow of 25 million Canadian yen and recorded a book loss of 12 million domestic yen. With just 25.5 million Canadian yen on the balance sheet, it looks like it will soon have to raise capital again. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we found 3 warning signs for Weigang Environmental Technology Holding Group (1 is a little unpleasant!) which you should be aware of before investing here.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.