LONGi Green Energy Technology (SHSE:601012) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that LONGi Green Energy Technology Co., Ltd. (SHSE:601012) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for LONGi Green Energy Technology

How Much Debt Does LONGi Green Energy Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 LONGi Green Energy Technology had CN¥19.5b of debt, an increase on CN¥9.88b, over one year. But it also has CN¥57.3b in cash to offset that, meaning it has CN¥37.8b net cash.

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

Zooming in on the latest balance sheet data, we can see that LONGi Green Energy Technology had liabilities of CN¥71.5b due within 12 months and liabilities of CN¥28.5b due beyond that. Offsetting this, it had CN¥57.3b in cash and CN¥13.9b in receivables that were due within 12 months. So its liabilities total CN¥28.7b more than the combination of its cash and short-term receivables.

LONGi Green Energy Technology has a very large market capitalization of CN¥104.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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!

The modesty of its debt load may become crucial for LONGi Green Energy Technology if management cannot prevent a repeat of the 51% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While LONGi Green Energy Technology 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. Over the last three years, LONGi Green Energy Technology recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While LONGi Green Energy Technology does have more liabilities than liquid assets, it also has net cash of CN¥37.8b. And it impressed us with free cash flow of -CN¥1.5b, being 85% of its EBIT. So we are not troubled with LONGi Green Energy Technology's debt use. 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. For example LONGi Green Energy Technology has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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.

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