Is EGing Photovoltaic TechnologyLtd (SHSE:600537) A Risky Investment?

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.' 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. As with many other companies EGing Photovoltaic Technology Co.,Ltd. (SHSE:600537) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for EGing Photovoltaic TechnologyLtd

What Is EGing Photovoltaic TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 EGing Photovoltaic TechnologyLtd had debt of CN¥562.3m, up from CN¥409.6m in one year. But on the other hand it also has CN¥1.71b in cash, leading to a CN¥1.14b net cash position.

A Look At EGing Photovoltaic TechnologyLtd's Liabilities

The latest balance sheet data shows that EGing Photovoltaic TechnologyLtd had liabilities of CN¥4.68b due within a year, and liabilities of CN¥2.33b falling due after that. On the other hand, it had cash of CN¥1.71b and CN¥1.59b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.71b.

This deficit is considerable relative to its market capitalization of CN¥3.77b, so it does suggest shareholders should keep an eye on EGing Photovoltaic TechnologyLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, EGing Photovoltaic TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since EGing Photovoltaic TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, EGing Photovoltaic TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥7.1b, which is a fall of 33%. That makes us nervous, to say the least.

So How Risky Is EGing Photovoltaic TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that EGing Photovoltaic TechnologyLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥906m and booked a CN¥270m accounting loss. With only CN¥1.14b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like EGing Photovoltaic TechnologyLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.