Is Sieyuan Electric (SZSE:002028) Using Too Much Debt?

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, Sieyuan Electric Co., Ltd. (SZSE:002028) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sieyuan Electric

What Is Sieyuan Electric's Net Debt?

As you can see below, Sieyuan Electric had CN¥144.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥4.81b in cash offsetting this, leading to net cash of CN¥4.66b.

How Healthy Is Sieyuan Electric's Balance Sheet?

We can see from the most recent balance sheet that Sieyuan Electric had liabilities of CN¥7.24b falling due within a year, and liabilities of CN¥187.0m due beyond that. On the other hand, it had cash of CN¥4.81b and CN¥6.21b worth of receivables due within a year. So it can boast CN¥3.59b more liquid assets than total liabilities.

This surplus suggests that Sieyuan Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sieyuan Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sieyuan Electric has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sieyuan Electric's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sieyuan Electric 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. Over the most recent three years, Sieyuan Electric recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sieyuan Electric has CN¥4.66b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 41% over the last year. So is Sieyuan Electric's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Sieyuan Electric, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.