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.' 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. We note that Shouhang High-Tech Energy Co., Ltd. (SZSE:002665) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
See our latest analysis for Shouhang High-Tech Energy
What Is Shouhang High-Tech Energy's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Shouhang High-Tech Energy had CN¥427.1m of debt in June 2023, down from CN¥1.66b, one year before. On the flip side, it has CN¥145.5m in cash leading to net debt of about CN¥281.6m.
A Look At Shouhang High-Tech Energy's Liabilities
The latest balance sheet data shows that Shouhang High-Tech Energy had liabilities of CN¥968.8m due within a year, and liabilities of CN¥1.37b falling due after that. Offsetting these obligations, it had cash of CN¥145.5m as well as receivables valued at CN¥1.51b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥675.7m.
Of course, Shouhang High-Tech Energy has a market capitalization of CN¥6.76b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shouhang High-Tech Energy will need earnings to service that debt. 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.
Over 12 months, Shouhang High-Tech Energy reported revenue of CN¥725m, which is a gain of 45%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, Shouhang High-Tech Energy still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥247m. 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. However, it doesn't help that it burned through CN¥102m of cash over the last year. So suffice it to say we do consider the stock to be 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. Case in point: We've spotted 2 warning signs for Shouhang High-Tech Energy you should be aware of.
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.
