Zhejiang Sunoren Solar TechnologyLtd (SHSE:603105) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Zhejiang Sunoren Solar Technology Co.,Ltd. (SHSE:603105) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zhejiang Sunoren Solar TechnologyLtd

How Much Debt Does Zhejiang Sunoren Solar TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Zhejiang Sunoren Solar TechnologyLtd had CN¥1.94b of debt, an increase on CN¥1.48b, over one year. On the flip side, it has CN¥510.6m in cash leading to net debt of about CN¥1.43b.

A Look At Zhejiang Sunoren Solar TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Zhejiang Sunoren Solar TechnologyLtd had liabilities of CN¥598.5m falling due within a year, and liabilities of CN¥1.62b due beyond that. Offsetting this, it had CN¥510.6m in cash and CN¥296.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.41b more than its cash and near-term receivables, combined.

Zhejiang Sunoren Solar TechnologyLtd has a market capitalization of CN¥4.08b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Zhejiang Sunoren Solar TechnologyLtd's debt is 2.9 times its EBITDA, and its EBIT cover its interest expense 3.7 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. More concerning, Zhejiang Sunoren Solar TechnologyLtd saw its EBIT drop by 3.7% in the last twelve months. If it keeps going like that paying off its debt will be like running on a treadmill -- a lot of effort for not much advancement. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhejiang Sunoren Solar TechnologyLtd's ability to maintain a healthy balance sheet going forward. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Zhejiang Sunoren Solar TechnologyLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

We'd go so far as to say Zhejiang Sunoren Solar TechnologyLtd's conversion of EBIT to free cash flow was disappointing. Having said that, its ability to handle its total liabilities isn't such a worry. Once we consider all the factors above, together, it seems to us that Zhejiang Sunoren Solar TechnologyLtd's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. We've identified 2 warning signs with Zhejiang Sunoren Solar TechnologyLtd (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.