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 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. We can see that Ming Yang Smart Energy Group Limited (SHSE:601615) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Ming Yang Smart Energy Group Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Ming Yang Smart Energy Group had debt of CN¥16.4b, up from CN¥11.3b in one year. However, because it has a cash reserve of CN¥11.2b, its net debt is less, at about CN¥5.23b.

A Look At Ming Yang Smart Energy Group's Liabilities

According to the last reported balance sheet, Ming Yang Smart Energy Group had liabilities of CN¥35.7b due within 12 months, and liabilities of CN¥19.0b due beyond 12 months. Offsetting this, it had CN¥11.2b in cash and CN¥19.3b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥24.2b.

This deficit is considerable relative to its market capitalization of CN¥26.1b, so it does suggest shareholders should keep an eye on Ming Yang Smart Energy Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ming Yang Smart Energy Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Ming Yang Smart Energy Group had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥27b. That's not what we would hope to see.

Caveat Emptor

Not only did Ming Yang Smart Energy Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥661m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥11b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. For example - Ming Yang Smart Energy Group has 1 warning sign 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.