Does Windey Energy Technology Group (SZSE:300772) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Windey Energy Technology Group Co., Ltd. (SZSE:300772) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Windey Energy Technology Group

What Is Windey Energy Technology Group's Debt?

As you can see below, at the end of March 2024, Windey Energy Technology Group had CN¥2.06b of debt, up from CN¥1.88b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.95b in cash, so it actually has CN¥1.89b net cash.

A Look At Windey Energy Technology Group's Liabilities

According to the last reported balance sheet, Windey Energy Technology Group had liabilities of CN¥23.5b due within 12 months, and liabilities of CN¥4.03b due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.95b as well as receivables valued at CN¥9.26b due within 12 months. So it has liabilities totalling CN¥14.3b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥7.43b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Windey Energy Technology Group would probably need a major re-capitalization if its creditors were to demand repayment. Given that Windey Energy Technology Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

The modesty of its debt load may become crucial for Windey Energy Technology Group if management cannot prevent a repeat of the 22% 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Windey Energy Technology Group 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. Windey Energy Technology Group 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, Windey Energy Technology Group burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although Windey Energy Technology Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.89b. However, we do find both Windey Energy Technology Group's level of total liabilities and its EBIT growth rate troubling. So even though it has net cash, we do think the business has some risks worth watching. 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. For example - Windey Energy Technology Group has 1 warning sign we think you should be aware of.

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.