Is Golden Solar New Energy Technology Holdings (HKG:1121) Using Debt Sensibly?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Golden Solar New Energy Technology Holdings Limited (HKG:1121) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Golden Solar New Energy Technology Holdings

What Is Golden Solar New Energy Technology Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Golden Solar New Energy Technology Holdings had CN¥90.2m in debt in June 2023; about the same as the year before. But on the other hand it also has CN¥304.1m in cash, leading to a CN¥213.9m net cash position.

How Strong Is Golden Solar New Energy Technology Holdings' Balance Sheet?

The latest balance sheet data shows that Golden Solar New Energy Technology Holdings had liabilities of CN¥193.6m due within a year, and liabilities of CN¥16.3m falling due after that. Offsetting these obligations, it had cash of CN¥304.1m as well as receivables valued at CN¥67.9m due within 12 months. So it actually has CN¥162.1m more liquid assets than total liabilities.

Having regard to Golden Solar New Energy Technology Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥11.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Golden Solar New Energy Technology Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Golden Solar New Energy Technology Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Golden Solar New Energy Technology Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 3.5%, to CN¥296m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Golden Solar New Energy Technology Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Golden Solar New Energy Technology Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥165m of cash and made a loss of CN¥189m. Given it only has net cash of CN¥213.9m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 instance, we've identified 1 warning sign for Golden Solar New Energy Technology Holdings that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.