These 4 Measures Indicate That Sieyuan Electric (SZSE:002028) Is Using Debt Safely

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. Importantly, Sieyuan Electric Co., Ltd. (SZSE:002028) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Sieyuan Electric

What Is Sieyuan Electric's Net Debt?

As you can see below, at the end of September 2024, Sieyuan Electric had CN¥206.8m of debt, up from CN¥131.8m a year ago. Click the image for more detail. But on the other hand it also has CN¥5.12b in cash, leading to a CN¥4.91b net cash position.

A Look At Sieyuan Electric's Liabilities

We can see from the most recent balance sheet that Sieyuan Electric had liabilities of CN¥9.41b falling due within a year, and liabilities of CN¥185.8m due beyond that. On the other hand, it had cash of CN¥5.12b and CN¥7.69b worth of receivables due within a year. So it actually has CN¥3.22b more liquid assets than total liabilities.

This short term liquidity is a sign that Sieyuan Electric could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sieyuan Electric has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Sieyuan Electric grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sieyuan Electric 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 67% 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 we empathize with investors who find debt concerning, you should keep in mind that Sieyuan Electric has net cash of CN¥4.91b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.