Jiangsu Haili Wind Power Equipment Technology (SZSE:301155) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Jiangsu Haili Wind Power Equipment Technology Co., Ltd. (SZSE:301155) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Jiangsu Haili Wind Power Equipment Technology

What Is Jiangsu Haili Wind Power Equipment Technology's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Haili Wind Power Equipment Technology had debt of CN¥751.1m, up from CN¥423.7m in one year. On the flip side, it has CN¥602.6m in cash leading to net debt of about CN¥148.5m.

How Strong Is Jiangsu Haili Wind Power Equipment Technology's Balance Sheet?

According to the last reported balance sheet, Jiangsu Haili Wind Power Equipment Technology had liabilities of CN¥2.21b due within 12 months, and liabilities of CN¥77.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥602.6m as well as receivables valued at CN¥1.67b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Jiangsu Haili Wind Power Equipment Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥8.48b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 Jiangsu Haili Wind Power Equipment Technology 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.

Over 12 months, Jiangsu Haili Wind Power Equipment Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 34%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jiangsu Haili Wind Power Equipment Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥196m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥1.0b in negative free cash flow over the last twelve months. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Jiangsu Haili Wind Power Equipment Technology's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.