Is Longyan Zhuoyue New Energy (SHSE:688196) Using Debt Sensibly?

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. Importantly, Longyan Zhuoyue New Energy Co., Ltd. (SHSE:688196) does carry debt. 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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Longyan Zhuoyue New Energy

How Much Debt Does Longyan Zhuoyue New Energy Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Longyan Zhuoyue New Energy had debt of CN¥425.6m, up from CN¥270.0m in one year. However, it does have CN¥611.0m in cash offsetting this, leading to net cash of CN¥185.5m.

How Healthy Is Longyan Zhuoyue New Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Longyan Zhuoyue New Energy had liabilities of CN¥253.3m due within 12 months and liabilities of CN¥297.7m due beyond that. Offsetting these obligations, it had cash of CN¥611.0m as well as receivables valued at CN¥137.1m due within 12 months. So it can boast CN¥197.2m more liquid assets than total liabilities.

This surplus suggests that Longyan Zhuoyue New Energy has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Longyan Zhuoyue New Energy boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Longyan Zhuoyue New Energy 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.

In the last year Longyan Zhuoyue New Energy had a loss before interest and tax, and actually shrunk its revenue by 26%, to CN¥2.9b. That makes us nervous, to say the least.

So How Risky Is Longyan Zhuoyue New Energy?

Although Longyan Zhuoyue New Energy had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥28m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Longyan Zhuoyue New Energy (at least 2 which are concerning) , and understanding them should be part of your investment process.

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.