Does Solartech International Holdings (HKG:1166) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Solartech International Holdings Limited (HKG:1166) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Solartech International Holdings

What Is Solartech International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Solartech International Holdings had debt of HK$229.2m at the end of December 2024, a reduction from HK$283.8m over a year. However, because it has a cash reserve of HK$87.3m, its net debt is less, at about HK$141.9m.

How Strong Is Solartech International Holdings' Balance Sheet?

The latest balance sheet data shows that Solartech International Holdings had liabilities of HK$367.1m due within a year, and liabilities of HK$155.0m falling due after that. On the other hand, it had cash of HK$87.3m and HK$196.7m worth of receivables due within a year. So its liabilities total HK$238.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$39.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Solartech International Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Solartech International Holdings'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.

Over 12 months, Solartech International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$528m, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Solartech International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$10m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost HK$56m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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 Solartech International Holdings has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.