Is LONGi Green Energy Technology (SHSE:601012) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that LONGi Green Energy Technology Co., Ltd. (SHSE:601012) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for LONGi Green Energy Technology

What Is LONGi Green Energy Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 LONGi Green Energy Technology had debt of CN¥21.4b, up from CN¥10.6b in one year. But it also has CN¥51.1b in cash to offset that, meaning it has CN¥29.8b net cash.

How Healthy Is LONGi Green Energy Technology's Balance Sheet?

According to the last reported balance sheet, LONGi Green Energy Technology had liabilities of CN¥63.0b due within 12 months, and liabilities of CN¥28.9b due beyond 12 months. On the other hand, it had cash of CN¥51.1b and CN¥14.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥26.3b.

While this might seem like a lot, it is not so bad since LONGi Green Energy Technology has a huge market capitalization of CN¥131.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, LONGi Green Energy Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 LONGi Green Energy Technology 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, LONGi Green Energy Technology made a loss at the EBIT level, and saw its revenue drop to CN¥94b, which is a fall of 31%. To be frank that doesn't bode well.

So How Risky Is LONGi Green Energy Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that LONGi Green Energy Technology 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¥16b and booked a CN¥7.4b accounting loss. Given it only has net cash of CN¥29.8b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for LONGi Green Energy Technology that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.