We Think LAPLACE Renewable Energy Technology (SHSE:688726) Can Stay On Top Of Its Debt

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. Importantly, LAPLACE Renewable Energy Technology Co., Ltd. (SHSE:688726) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for LAPLACE Renewable Energy Technology

What Is LAPLACE Renewable Energy Technology's Net Debt?

The image below, which you can click on for greater detail, shows that LAPLACE Renewable Energy Technology had debt of CN¥233.4m at the end of September 2024, a reduction from CN¥263.3m over a year. But it also has CN¥931.4m in cash to offset that, meaning it has CN¥698.0m net cash.

A Look At LAPLACE Renewable Energy Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that LAPLACE Renewable Energy Technology had liabilities of CN¥7.06b due within 12 months and liabilities of CN¥176.6m due beyond that. Offsetting these obligations, it had cash of CN¥931.4m as well as receivables valued at CN¥2.00b due within 12 months. So its liabilities total CN¥4.31b more than the combination of its cash and short-term receivables.

LAPLACE Renewable Energy Technology has a market capitalization of CN¥17.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, LAPLACE Renewable Energy Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, LAPLACE Renewable Energy Technology grew its EBIT by 198% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is LAPLACE Renewable Energy Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. LAPLACE Renewable Energy Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, LAPLACE Renewable Energy Technology recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although LAPLACE Renewable Energy Technology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥698.0m. And it impressed us with its EBIT growth of 198% over the last year. So we don't have any problem with LAPLACE Renewable Energy Technology's use of debt. 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. For example LAPLACE Renewable Energy Technology has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.