Is Solareast Holdings (SHSE:603366) Weighed On By Its Debt Load?

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.' 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. Importantly, Solareast Holdings Co., Ltd. (SHSE:603366) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

How Much Debt Does Solareast Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Solareast Holdings had CN¥260.2m of debt in September 2024, down from CN¥350.7m, one year before. However, its balance sheet shows it holds CN¥835.2m in cash, so it actually has CN¥575.0m 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¥2.86b falling due within a year, and liabilities of CN¥309.7m due beyond that. Offsetting these obligations, it had cash of CN¥835.2m as well as receivables valued at CN¥565.4m due within 12 months. So it has liabilities totalling CN¥1.77b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Solareast Holdings is worth CN¥8.10b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Solareast Holdings 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 it is Solareast Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Solareast Holdings

Over 12 months, Solareast Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

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 when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 4 warning signs with Solareast Holdings , and understanding them should be part of your investment process.

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.