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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Sany Renewable Energy Co.,Ltd. (SHSE:688349) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sany Renewable EnergyLtd

How Much Debt Does Sany Renewable EnergyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sany Renewable EnergyLtd had CN¥4.51b of debt, an increase on CN¥3.78b, over one year. However, it does have CN¥8.65b in cash offsetting this, leading to net cash of CN¥4.14b.

How Strong Is Sany Renewable EnergyLtd's Balance Sheet?

We can see from the most recent balance sheet that Sany Renewable EnergyLtd had liabilities of CN¥20.4b falling due within a year, and liabilities of CN¥4.15b due beyond that. Offsetting this, it had CN¥8.65b in cash and CN¥8.54b in receivables that were due within 12 months. So it has liabilities totalling CN¥7.33b more than its cash and near-term receivables, combined.

Sany Renewable EnergyLtd has a market capitalization of CN¥33.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

The modesty of its debt load may become crucial for Sany Renewable EnergyLtd if management cannot prevent a repeat of the 55% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sany Renewable EnergyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Sany Renewable EnergyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Sany Renewable EnergyLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥4.14b. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Sany Renewable EnergyLtd (at least 1 which is concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.