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. Importantly, EGing Photovoltaic Technology Co.,Ltd. (SHSE:600537) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is EGing Photovoltaic TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 EGing Photovoltaic TechnologyLtd had debt of CN¥591.7m, up from CN¥367.9m in one year. But on the other hand it also has CN¥1.23b in cash, leading to a CN¥634.9m net cash position.

A Look At EGing Photovoltaic TechnologyLtd's Liabilities

The latest balance sheet data shows that EGing Photovoltaic TechnologyLtd had liabilities of CN¥3.32b due within a year, and liabilities of CN¥2.51b falling due after that. Offsetting these obligations, it had cash of CN¥1.23b as well as receivables valued at CN¥833.9m due within 12 months. So its liabilities total CN¥3.77b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥4.44b, so it does suggest shareholders should keep an eye on EGing Photovoltaic TechnologyLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, EGing Photovoltaic TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since EGing Photovoltaic TechnologyLtd 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 EGing Photovoltaic TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 62%, to CN¥4.1b. To be frank that doesn't bode well.

So How Risky Is EGing Photovoltaic TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months EGing Photovoltaic TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥310m and booked a CN¥806m accounting loss. With only CN¥634.9m 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. For riskier companies like EGing Photovoltaic TechnologyLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.