Does Shandong Sacred Sun Power SourcesLtd (SZSE:002580) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Shandong Sacred Sun Power Sources Co.,Ltd (SZSE:002580) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shandong Sacred Sun Power SourcesLtd

How Much Debt Does Shandong Sacred Sun Power SourcesLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shandong Sacred Sun Power SourcesLtd had CN¥399.3m of debt, an increase on CN¥302.8m, over one year. But it also has CN¥510.8m in cash to offset that, meaning it has CN¥111.5m net cash.

How Strong Is Shandong Sacred Sun Power SourcesLtd's Balance Sheet?

According to the last reported balance sheet, Shandong Sacred Sun Power SourcesLtd had liabilities of CN¥817.4m due within 12 months, and liabilities of CN¥432.4m due beyond 12 months. On the other hand, it had cash of CN¥510.8m and CN¥1.16b worth of receivables due within a year. So it can boast CN¥423.7m more liquid assets than total liabilities.

This surplus suggests that Shandong Sacred Sun Power SourcesLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shandong Sacred Sun Power SourcesLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Shandong Sacred Sun Power SourcesLtd if management cannot prevent a repeat of the 30% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shandong Sacred Sun Power SourcesLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shandong Sacred Sun Power SourcesLtd 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. During the last three years, Shandong Sacred Sun Power SourcesLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shandong Sacred Sun Power SourcesLtd has CN¥111.5m in net cash and a decent-looking balance sheet. So while Shandong Sacred Sun Power SourcesLtd does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shandong Sacred Sun Power SourcesLtd .

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.

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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.