Is Solareast Holdings (SHSE:603366) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Solareast Holdings Co., Ltd. (SHSE:603366) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Solareast Holdings

What Is Solareast Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Solareast Holdings had debt of CN¥260.2m at the end of September 2024, a reduction from CN¥350.7m over a year. However, its balance sheet shows it holds CN¥835.2m in cash, so it actually has CN¥575.0m net cash.

A Look At Solareast Holdings' Liabilities

According to the last reported balance sheet, Solareast Holdings had liabilities of CN¥2.86b due within 12 months, and liabilities of CN¥309.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥835.2m as well as receivables valued at CN¥565.4m due within 12 months. So its liabilities total CN¥1.77b more than the combination of its cash and short-term receivables.

Since publicly traded Solareast Holdings shares are worth a total of CN¥10.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 it is Solareast Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Solareast Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

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¥106m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For instance, we've identified 4 warning signs for Solareast Holdings (1 is potentially serious) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.