We Think Jinko Solar (SHSE:688223) Can Stay On Top Of Its Debt

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.' 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. As with many other companies Jinko Solar Co., Ltd. (SHSE:688223) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jinko Solar

What Is Jinko Solar's Net Debt?

The chart below, which you can click on for greater detail, shows that Jinko Solar had CN¥17.0b in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds CN¥24.9b in cash, so it actually has CN¥7.85b net cash.

How Healthy Is Jinko Solar's Balance Sheet?

The latest balance sheet data shows that Jinko Solar had liabilities of CN¥69.7b due within a year, and liabilities of CN¥25.7b falling due after that. On the other hand, it had cash of CN¥24.9b and CN¥27.2b worth of receivables due within a year. So it has liabilities totalling CN¥43.4b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥69.0b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Jinko Solar boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jinko Solar grew its EBIT by 96% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jinko Solar'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jinko Solar 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. During the last three years, Jinko Solar burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Jinko Solar does have more liabilities than liquid assets, it also has net cash of CN¥7.85b. And we liked the look of last year's 96% year-on-year EBIT growth. So we are not troubled with Jinko Solar'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, we've discovered 1 warning sign for Jinko Solar that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.