Warren Buffett famously said, '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 note that Sany Renewable Energy Co.,Ltd. (SHSE:688349) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Sany Renewable EnergyLtd Carry?
The image below, which you can click on for greater detail, shows that at March 2024 Sany Renewable EnergyLtd had debt of CN¥4.19b, up from CN¥3.30b in one year. But on the other hand it also has CN¥10.9b in cash, leading to a CN¥6.72b net cash position.
How Healthy Is Sany Renewable EnergyLtd's Balance Sheet?
According to the last reported balance sheet, Sany Renewable EnergyLtd had liabilities of CN¥18.7b due within 12 months, and liabilities of CN¥2.74b due beyond 12 months. Offsetting this, it had CN¥10.9b in cash and CN¥7.35b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.22b more than its cash and near-term receivables, combined.
Since publicly traded Sany Renewable EnergyLtd shares are worth a total of CN¥33.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Sany Renewable EnergyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Sany Renewable EnergyLtd 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.
Over 12 months, Sany Renewable EnergyLtd reported revenue of CN¥15b, which is a gain of 28%, 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.
So How Risky Is Sany Renewable EnergyLtd?
While Sany Renewable EnergyLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥1.8b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that Sany Renewable EnergyLtd is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is 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 instance, we've identified 2 warning signs for Sany Renewable EnergyLtd (1 shouldn't be ignored) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.