Is Shuangliang Eco-Energy SystemsLtd (SHSE:600481) Using Debt In A Risky Way?

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, Shuangliang Eco-Energy Systems Co.,Ltd (SHSE:600481) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shuangliang Eco-Energy SystemsLtd

What Is Shuangliang Eco-Energy SystemsLtd's Net Debt?

As you can see below, at the end of September 2024, Shuangliang Eco-Energy SystemsLtd had CN¥14.4b of debt, up from CN¥9.17b a year ago. Click the image for more detail. On the flip side, it has CN¥7.65b in cash leading to net debt of about CN¥6.74b.

How Strong Is Shuangliang Eco-Energy SystemsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shuangliang Eco-Energy SystemsLtd had liabilities of CN¥20.4b due within 12 months and liabilities of CN¥5.17b due beyond that. Offsetting these obligations, it had cash of CN¥7.65b as well as receivables valued at CN¥3.26b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥14.7b.

Given this deficit is actually higher than the company's market capitalization of CN¥10.2b, we think shareholders really should watch Shuangliang Eco-Energy SystemsLtd's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shuangliang Eco-Energy SystemsLtd 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 Shuangliang Eco-Energy SystemsLtd had a loss before interest and tax, and actually shrunk its revenue by 40%, to CN¥15b. That makes us nervous, to say the least.

Caveat Emptor

While Shuangliang Eco-Energy SystemsLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥945m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥1.0b in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Shuangliang Eco-Energy SystemsLtd (including 1 which can't be ignored) .

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.

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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.