Here's Why Sineng ElectricLtd (SZSE:300827) Can Manage Its Debt Responsibly

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. We can see that Sineng Electric Co.,Ltd. (SZSE:300827) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sineng ElectricLtd

What Is Sineng ElectricLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Sineng ElectricLtd had CN¥868.3m of debt, an increase on CN¥774.9m, over one year. But it also has CN¥1.12b in cash to offset that, meaning it has CN¥248.9m net cash.

How Strong Is Sineng ElectricLtd's Balance Sheet?

The latest balance sheet data shows that Sineng ElectricLtd had liabilities of CN¥4.24b due within a year, and liabilities of CN¥178.5m falling due after that. Offsetting these obligations, it had cash of CN¥1.12b as well as receivables valued at CN¥2.88b due within 12 months. So it has liabilities totalling CN¥419.4m more than its cash and near-term receivables, combined.

Given Sineng ElectricLtd has a market capitalization of CN¥9.20b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sineng ElectricLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Sineng ElectricLtd grew its EBIT by 230% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sineng ElectricLtd'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. While Sineng ElectricLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Sineng ElectricLtd saw substantial negative free cash flow, in total. 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sineng ElectricLtd has CN¥248.9m in net cash. And it impressed us with its EBIT growth of 230% over the last year. So we don't have any problem with Sineng ElectricLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Sineng ElectricLtd is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.