Health Check: How Prudently Does Shanghai Electric Wind Power Group (SHSE:688660) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Shanghai Electric Wind Power Group Co., Ltd. (SHSE:688660) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shanghai Electric Wind Power Group

What Is Shanghai Electric Wind Power Group's Debt?

As you can see below, Shanghai Electric Wind Power Group had CN¥3.40b of debt at September 2024, down from CN¥3.66b a year prior. However, it also had CN¥1.84b in cash, and so its net debt is CN¥1.56b.

How Strong Is Shanghai Electric Wind Power Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Electric Wind Power Group had liabilities of CN¥16.7b due within 12 months and liabilities of CN¥4.76b due beyond that. Offsetting this, it had CN¥1.84b in cash and CN¥8.33b in receivables that were due within 12 months. So it has liabilities totalling CN¥11.3b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥12.0b, so it does suggest shareholders should keep an eye on Shanghai Electric Wind Power Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Electric Wind Power Group'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.

In the last year Shanghai Electric Wind Power Group had a loss before interest and tax, and actually shrunk its revenue by 35%, to CN¥7.3b. To be frank that doesn't bode well.

Caveat Emptor

While Shanghai Electric Wind Power Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥1.6b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥3.7b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. We've identified 3 warning signs with Shanghai Electric Wind Power Group , 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.