Does Solartech International Holdings (HKG:1166) 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. Importantly, Solartech International Holdings Limited (HKG:1166) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Solartech International Holdings

What Is Solartech International Holdings's Net Debt?

As you can see below, at the end of December 2020, Solartech International Holdings had HK$184.0m of debt, up from HK$168.6m a year ago. Click the image for more detail. However, it also had HK$46.3m in cash, and so its net debt is HK$137.7m.

How Healthy Is Solartech International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Solartech International Holdings had liabilities of HK$355.8m due within 12 months and liabilities of HK$97.5m due beyond that. On the other hand, it had cash of HK$46.3m and HK$323.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$83.1m.

This deficit isn't so bad because Solartech International Holdings is worth HK$213.7m, and thus could probably raise enough capital to shore up 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Solartech International Holdings's earnings that will influence how the balance sheet holds up in the future. 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, Solartech International Holdings reported revenue of HK$333m, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Solartech International Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$55m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of HK$89m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Solartech International Holdings has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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