Titan Wind Energy (Suzhou)Ltd (SZSE:002531) Seems To Be Using A Lot Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Titan Wind Energy (Suzhou) Co.,Ltd (SZSE:002531) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Titan Wind Energy (Suzhou)Ltd

What Is Titan Wind Energy (Suzhou)Ltd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Titan Wind Energy (Suzhou)Ltd had debt of CN¥10.8b, up from CN¥10.1b in one year. However, because it has a cash reserve of CN¥677.1m, its net debt is less, at about CN¥10.1b.

How Healthy Is Titan Wind Energy (Suzhou)Ltd's Balance Sheet?

According to the last reported balance sheet, Titan Wind Energy (Suzhou)Ltd had liabilities of CN¥9.14b due within 12 months, and liabilities of CN¥7.17b due beyond 12 months. On the other hand, it had cash of CN¥677.1m and CN¥5.46b worth of receivables due within a year. So it has liabilities totalling CN¥10.2b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥12.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 2.2 times and a disturbingly high net debt to EBITDA ratio of 6.8 hit our confidence in Titan Wind Energy (Suzhou)Ltd like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Titan Wind Energy (Suzhou)Ltd's EBIT was down 43% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that 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 Titan Wind Energy (Suzhou)Ltd can strengthen its balance sheet over time. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Titan Wind Energy (Suzhou)Ltd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

On the face of it, Titan Wind Energy (Suzhou)Ltd's net debt to EBITDA left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its interest cover also fails to instill confidence. Taking into account all the aforementioned factors, it looks like Titan Wind Energy (Suzhou)Ltd has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Titan Wind Energy (Suzhou)Ltd has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.