Is Sany Renewable EnergyLtd (SHSE:688349) Weighed On By Its Debt Load?

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.' 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. We note that Sany Renewable Energy Co.,Ltd. (SHSE:688349) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sany Renewable EnergyLtd

What Is Sany Renewable EnergyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Sany Renewable EnergyLtd had debt of CN¥4.19b, up from CN¥3.30b in one year. However, its balance sheet shows it holds CN¥10.9b in cash, so it actually has CN¥6.72b net cash.

A Look At Sany Renewable EnergyLtd's Liabilities

The latest balance sheet data shows that Sany Renewable EnergyLtd had liabilities of CN¥18.7b due within a year, and liabilities of CN¥2.74b falling due after that. On the other hand, it had cash of CN¥10.9b and CN¥7.35b worth of receivables due within a year. So its liabilities total CN¥3.22b more than the combination of its cash and short-term receivables.

Given Sany Renewable EnergyLtd has a market capitalization of CN¥29.2b, it's hard to believe these liabilities pose much 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, Sany Renewable EnergyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, Sany Renewable EnergyLtd reported revenue of CN¥15b, which is a gain of 28%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sany Renewable EnergyLtd?

While Sany Renewable EnergyLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥1.8b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for Sany Renewable EnergyLtd shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. 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) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com