Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that LONGi Green Energy Technology Co., Ltd. (SHSE:601012) does use debt in its business. But should shareholders be worried about its use of debt?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is LONGi Green Energy Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 LONGi Green Energy Technology had debt of CN¥20.7b, up from CN¥10.4b in one year. But it also has CN¥54.5b in cash to offset that, meaning it has CN¥33.8b net cash.

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

The latest balance sheet data shows that LONGi Green Energy Technology had liabilities of CN¥66.3b due within a year, and liabilities of CN¥27.7b falling due after that. On the other hand, it had cash of CN¥54.5b and CN¥13.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥25.9b.

This deficit isn't so bad because LONGi Green Energy Technology is worth a massive CN¥100.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, LONGi Green Energy Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year LONGi Green Energy Technology had a loss before interest and tax, and actually shrunk its revenue by 28%, to CN¥103b. To be frank that doesn't bode well.

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¥11b of cash and made a loss of CN¥3.7b. With only CN¥33.8b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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.