Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sieyuan Electric Co., Ltd. (SZSE:002028) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Sieyuan Electric's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sieyuan Electric had CN¥157.0m of debt, an increase on CN¥55.0m, over one year. But on the other hand it also has CN¥4.81b in cash, leading to a CN¥4.65b net cash position.

How Strong Is Sieyuan Electric's Balance Sheet?

According to the last reported balance sheet, Sieyuan Electric had liabilities of CN¥7.24b due within 12 months, and liabilities of CN¥187.0m due beyond 12 months. Offsetting this, it had CN¥4.81b in cash and CN¥6.21b in receivables that were due within 12 months. So it actually has CN¥3.59b more liquid assets than total liabilities.

This short term liquidity is a sign that Sieyuan Electric could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sieyuan Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sieyuan Electric grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sieyuan Electric'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sieyuan Electric 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, Sieyuan Electric produced sturdy free cash flow equating to 56% 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 Sieyuan Electric has CN¥4.65b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 34% over the last year. So is Sieyuan Electric's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sieyuan Electric's earnings per share history for free.

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.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com