Is Sany Renewable EnergyLtd (SHSE:688349) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sany Renewable Energy Co.,Ltd. (SHSE:688349) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sany Renewable EnergyLtd

What Is Sany Renewable EnergyLtd's Net Debt?

As you can see below, at the end of June 2024, Sany Renewable EnergyLtd had CN¥5.23b of debt, up from CN¥3.25b a year ago. Click the image for more detail. However, it does have CN¥10.2b in cash offsetting this, leading to net cash of CN¥4.96b.

A Look At Sany Renewable EnergyLtd's Liabilities

We can see from the most recent balance sheet that Sany Renewable EnergyLtd had liabilities of CN¥17.9b falling due within a year, and liabilities of CN¥4.15b due beyond that. On the other hand, it had cash of CN¥10.2b and CN¥6.97b worth of receivables due within a year. So it has liabilities totalling CN¥4.86b more than its cash and near-term receivables, combined.

Given Sany Renewable EnergyLtd has a market capitalization of CN¥35.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sany Renewable EnergyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Sany Renewable EnergyLtd's load is not too heavy, because its EBIT was down 97% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sany Renewable EnergyLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sany Renewable EnergyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Sany Renewable EnergyLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While Sany Renewable EnergyLtd does have more liabilities than liquid assets, it also has net cash of CN¥4.96b. So although we see some areas for improvement, we're not too worried about Sany Renewable EnergyLtd's balance sheet. 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. To that end, you should learn about the 2 warning signs we've spotted with Sany Renewable EnergyLtd (including 1 which can't be ignored) .

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.