Warren Buffett famously said, '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 can see that Solareast Holdings Co., Ltd. (SHSE:603366) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Solareast Holdings Carry?

As you can see below, Solareast Holdings had CN¥786.1m of debt at June 2024, down from CN¥835.8m a year prior. But it also has CN¥1.42b in cash to offset that, meaning it has CN¥632.5m net cash.

How Healthy Is Solareast Holdings' Balance Sheet?

We can see from the most recent balance sheet that Solareast Holdings had liabilities of CN¥2.80b falling due within a year, and liabilities of CN¥143.6m due beyond that. On the other hand, it had cash of CN¥1.42b and CN¥560.9m worth of receivables due within a year. So it has liabilities totalling CN¥966.7m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Solareast Holdings has a market capitalization of CN¥3.58b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Solareast Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Solareast Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Solareast Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥4.9b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Solareast Holdings?

While Solareast Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥173m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 example - Solareast Holdings has 3 warning signs we think 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.