These 4 Measures Indicate That Moon Environment TechnologyLtd (SZSE:000811) Is Using Debt Safely

Simply Wall St · 10/16 01:12

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Moon Environment Technology Co.,Ltd. (SZSE:000811) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Moon Environment TechnologyLtd

How Much Debt Does Moon Environment TechnologyLtd Carry?

As you can see below, Moon Environment TechnologyLtd had CN¥903.8m of debt at June 2024, down from CN¥1.01b a year prior. But it also has CN¥2.86b in cash to offset that, meaning it has CN¥1.95b net cash.

debt-equity-history-analysis
SZSE:000811 Debt to Equity History October 16th 2024

A Look At Moon Environment TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Moon Environment TechnologyLtd had liabilities of CN¥4.29b due within 12 months and liabilities of CN¥754.3m due beyond that. Offsetting this, it had CN¥2.86b in cash and CN¥2.73b in receivables that were due within 12 months. So it actually has CN¥535.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Moon Environment TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Moon Environment TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Moon Environment TechnologyLtd grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Moon Environment TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Moon Environment TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Moon Environment TechnologyLtd produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Moon Environment TechnologyLtd has CN¥1.95b in net cash and a decent-looking balance sheet. And we liked the look of last year's 28% year-on-year EBIT growth. So we don't think Moon Environment TechnologyLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Moon Environment TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.