Is EGing Photovoltaic TechnologyLtd (SHSE:600537) Using Too Much Debt?

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. 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for EGing Photovoltaic TechnologyLtd

What Is EGing Photovoltaic TechnologyLtd's Debt?

As you can see below, at the end of September 2023, EGing Photovoltaic TechnologyLtd had CN¥367.9m of debt, up from CN¥351.5m a year ago. Click the image for more detail. However, it does have CN¥4.00b in cash offsetting this, leading to net cash of CN¥3.63b.

How Healthy Is EGing Photovoltaic TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that EGing Photovoltaic TechnologyLtd had liabilities of CN¥7.89b due within a year, and liabilities of CN¥1.40b falling due after that. Offsetting these obligations, it had cash of CN¥4.00b as well as receivables valued at CN¥2.23b due within 12 months. So its liabilities total CN¥3.07b more than the combination of its cash and short-term receivables.

EGing Photovoltaic TechnologyLtd has a market capitalization of CN¥5.42b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, EGing Photovoltaic TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although EGing Photovoltaic TechnologyLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥514m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is EGing Photovoltaic TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While EGing Photovoltaic TechnologyLtd 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. Looking at the most recent year, EGing Photovoltaic TechnologyLtd recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although EGing Photovoltaic TechnologyLtd'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¥3.63b. So we are not troubled with EGing Photovoltaic TechnologyLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for EGing Photovoltaic TechnologyLtd that you should be aware of.

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.