Dongjiang Environmental (HKG:895) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Dongjiang Environmental Company Limited (HKG:895) does use debt in its business. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Dongjiang Environmental's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Dongjiang Environmental had debt of CN¥5.74b, up from CN¥5.48b in one year. On the flip side, it has CN¥1.17b in cash leading to net debt of about CN¥4.57b.

How Strong Is Dongjiang Environmental's Balance Sheet?

According to the last reported balance sheet, Dongjiang Environmental had liabilities of CN¥3.75b due within 12 months, and liabilities of CN¥3.45b due beyond 12 months. Offsetting this, it had CN¥1.17b in cash and CN¥1.33b in receivables that were due within 12 months. So it has liabilities totalling CN¥4.71b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥4.59b, we think shareholders really should watch Dongjiang Environmental's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dongjiang Environmental'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.

Check out our latest analysis for Dongjiang Environmental

In the last year Dongjiang Environmental had a loss before interest and tax, and actually shrunk its revenue by 3.8%, to CN¥3.4b. That's not what we would hope to see.

Caveat Emptor

Importantly, Dongjiang Environmental had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥542m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥74m in negative free cash flow over the last year. That means it's on the risky side of things. 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 - Dongjiang Environmental has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.