Is Shanghai Aiko Solar EnergyLtd (SHSE:600732) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Shanghai Aiko Solar Energy Co.,Ltd. (SHSE:600732) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai Aiko Solar EnergyLtd

How Much Debt Does Shanghai Aiko Solar EnergyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Shanghai Aiko Solar EnergyLtd had debt of CN¥15.1b, up from CN¥5.94b in one year. On the flip side, it has CN¥3.55b in cash leading to net debt of about CN¥11.5b.

How Strong Is Shanghai Aiko Solar EnergyLtd's Balance Sheet?

According to the last reported balance sheet, Shanghai Aiko Solar EnergyLtd had liabilities of CN¥18.1b due within 12 months, and liabilities of CN¥12.9b due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.55b as well as receivables valued at CN¥1.00b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥26.5b.

When you consider that this deficiency exceeds the company's CN¥20.3b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Aiko Solar EnergyLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Shanghai Aiko Solar EnergyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥12b, which is a fall of 61%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shanghai Aiko Solar EnergyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥3.3b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥8.3b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shanghai Aiko Solar EnergyLtd .

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.