Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, LONGi Green Energy Technology Co., Ltd. (SHSE:601012) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, 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 LONGi Green Energy Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 LONGi Green Energy Technology had debt of CN¥21.4b, up from CN¥10.6b in one year. But it also has CN¥51.1b in cash to offset that, meaning it has CN¥29.8b net cash.

How Strong Is LONGi Green Energy Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LONGi Green Energy Technology had liabilities of CN¥63.0b due within 12 months and liabilities of CN¥28.9b due beyond that. Offsetting these obligations, it had cash of CN¥51.1b as well as receivables valued at CN¥14.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥26.3b.

This deficit isn't so bad because LONGi Green Energy Technology is worth a massive CN¥123.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, LONGi Green Energy Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 LONGi Green Energy Technology 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.

In the last year LONGi Green Energy Technology had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥94b. That makes us nervous, to say the least.

So How Risky Is LONGi Green Energy Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that LONGi Green Energy Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥16b of cash and made a loss of CN¥7.4b. Given it only has net cash of CN¥29.8b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for LONGi Green Energy Technology that 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.