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.' 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, Golden Solar New Energy Technology Holdings Limited (HKG:1121) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Golden Solar New Energy Technology Holdings's Debt?

As you can see below, at the end of June 2024, Golden Solar New Energy Technology Holdings had CN¥100.2m of debt, up from CN¥90.2m a year ago. Click the image for more detail. However, it also had CN¥81.0m in cash, and so its net debt is CN¥19.2m.

How Healthy Is Golden Solar New Energy Technology Holdings' Balance Sheet?

We can see from the most recent balance sheet that Golden Solar New Energy Technology Holdings had liabilities of CN¥224.8m falling due within a year, and liabilities of CN¥47.1m due beyond that. On the other hand, it had cash of CN¥81.0m and CN¥110.1m worth of receivables due within a year. So its liabilities total CN¥80.8m more than the combination of its cash and short-term receivables.

Having regard to Golden Solar New Energy Technology Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.62b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Golden Solar New Energy Technology Holdings has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Golden Solar New Energy Technology Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Golden Solar New Energy Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.6%, to CN¥267m. We would much prefer see growth.

Caveat Emptor

Importantly, Golden Solar New Energy Technology Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥360m. 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¥254m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Golden Solar New Energy Technology Holdings has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.