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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Golden Solar New Energy Technology Holdings Limited (HKG:1121) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Golden Solar New Energy Technology Holdings

How Much Debt Does Golden Solar New Energy Technology Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Golden Solar New Energy Technology Holdings had CN¥100.2m of debt, an increase on CN¥91.0m, over one year. But it also has CN¥142.7m in cash to offset that, meaning it has CN¥42.5m net cash.

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

Zooming in on the latest balance sheet data, we can see that Golden Solar New Energy Technology Holdings had liabilities of CN¥261.3m due within 12 months and liabilities of CN¥61.7m due beyond that. Offsetting these obligations, it had cash of CN¥142.7m as well as receivables valued at CN¥190.7m due within 12 months. So it can boast CN¥10.4m more liquid assets than total liabilities.

This state of affairs indicates that Golden Solar New Energy Technology Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥8.97b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Golden Solar New Energy Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 7.7%, to CN¥295m. 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 in the last year Golden Solar New Energy Technology Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥254m of cash and made a loss of CN¥326m. With only CN¥42.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Golden Solar New Energy Technology Holdings (of which 1 is a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.