Is Changzhou Shichuang EnergyLtd (SHSE:688429) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Changzhou Shichuang Energy Co.,Ltd. (SHSE:688429) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Changzhou Shichuang EnergyLtd

What Is Changzhou Shichuang EnergyLtd's Debt?

As you can see below, at the end of September 2024, Changzhou Shichuang EnergyLtd had CN¥526.9m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥888.8m in cash to offset that, meaning it has CN¥361.9m net cash.

How Healthy Is Changzhou Shichuang EnergyLtd's Balance Sheet?

We can see from the most recent balance sheet that Changzhou Shichuang EnergyLtd had liabilities of CN¥1.25b falling due within a year, and liabilities of CN¥229.0m due beyond that. On the other hand, it had cash of CN¥888.8m and CN¥449.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥140.0m.

Of course, Changzhou Shichuang EnergyLtd has a market capitalization of CN¥6.52b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Changzhou Shichuang EnergyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Changzhou Shichuang EnergyLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Changzhou Shichuang EnergyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥839m, which is a fall of 59%. That makes us nervous, to say the least.

So How Risky Is Changzhou Shichuang EnergyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Changzhou Shichuang EnergyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥679m of cash and made a loss of CN¥499m. With only CN¥361.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 2 warning signs for Changzhou Shichuang EnergyLtd you should be aware of, and 1 of them doesn't sit too well with us.

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.