Stock Analysis

CSI Solar (SHSE:688472) Takes On Some Risk With Its Use Of Debt

SHSE:688472
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 CSI Solar Co., Ltd. (SHSE:688472) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CSI Solar

How Much Debt Does CSI Solar Carry?

As you can see below, CSI Solar had CN¥12.7b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥13.9b in cash to offset that, meaning it has CN¥1.26b net cash.

debt-equity-history-analysis
SHSE:688472 Debt to Equity History October 27th 2024

How Strong Is CSI Solar's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CSI Solar had liabilities of CN¥32.4b due within 12 months and liabilities of CN¥9.78b due beyond that. Offsetting this, it had CN¥13.9b in cash and CN¥10.7b in receivables that were due within 12 months. So its liabilities total CN¥17.5b more than the combination of its cash and short-term receivables.

CSI Solar has a market capitalization of CN¥57.5b, 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. Despite its noteworthy liabilities, CSI Solar 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 CSI Solar if management cannot prevent a repeat of the 38% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 CSI Solar can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CSI 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, CSI Solar burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While CSI Solar does have more liabilities than liquid assets, it also has net cash of CN¥1.26b. Despite its cash we think that CSI Solar seems to struggle to grow its EBIT, so we are wary of the stock. 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 3 warning signs for CSI Solar that you should be aware of before investing here.

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.