These 4 Measures Indicate That Contiocean Environment Tech Group (HKG:2613) Is Using Debt Reasonably Well
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Contiocean Environment Tech Group Co., Ltd. (HKG:2613) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Contiocean Environment Tech Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2025 Contiocean Environment Tech Group had CN¥167.3m of debt, an increase on CN¥27.0m, over one year. However, it does have CN¥434.6m in cash offsetting this, leading to net cash of CN¥267.3m.
A Look At Contiocean Environment Tech Group's Liabilities
We can see from the most recent balance sheet that Contiocean Environment Tech Group had liabilities of CN¥293.7m falling due within a year, and liabilities of CN¥41.4m due beyond that. Offsetting these obligations, it had cash of CN¥434.6m as well as receivables valued at CN¥213.2m due within 12 months. So it actually has CN¥312.6m more liquid assets than total liabilities.
This surplus suggests that Contiocean Environment Tech Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Contiocean Environment Tech Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Check out our latest analysis for Contiocean Environment Tech Group
The modesty of its debt load may become crucial for Contiocean Environment Tech Group if management cannot prevent a repeat of the 72% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Contiocean Environment Tech Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Contiocean Environment Tech Group 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 help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Contiocean Environment Tech Group reported free cash flow worth 14% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Contiocean Environment Tech Group has CN¥267.3m in net cash and a decent-looking balance sheet. So we don't have any problem with Contiocean Environment Tech Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Contiocean Environment Tech Group (2 are potentially serious) you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.