Does CSI Solar (SHSE:688472) Have A Healthy 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. We note that CSI Solar Co., Ltd. (SHSE:688472) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. 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

What Is CSI Solar's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 CSI Solar had CN¥15.0b of debt, an increase on CN¥8.36b, over one year. But it also has CN¥18.8b in cash to offset that, meaning it has CN¥3.85b net cash.

How Healthy Is CSI Solar's Balance Sheet?

We can see from the most recent balance sheet that CSI Solar had liabilities of CN¥36.3b falling due within a year, and liabilities of CN¥9.34b due beyond that. Offsetting this, it had CN¥18.8b in cash and CN¥8.74b in receivables that were due within 12 months. So its liabilities total CN¥18.0b more than the combination of its cash and short-term receivables.

CSI Solar has a market capitalization of CN¥37.4b, 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. While it does have liabilities worth noting, CSI Solar also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, CSI Solar's EBIT dived 20%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CSI Solar 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.

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¥3.85b. Despite the cash, we do find CSI Solar's conversion of EBIT to free cash flow concerning, so we're not particularly comfortable with the stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for CSI Solar (1 doesn't sit too well with us) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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