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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Golden Solar New Energy Technology Holdings Limited (HKG:1121) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

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

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

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Golden Solar New Energy Technology Holdings had CN¥100.2m of debt, an increase on CN¥90.2m, over one year. However, it does have CN¥81.0m in cash offsetting this, leading to net debt of about CN¥19.2m.

A Look At Golden Solar New Energy Technology Holdings' Liabilities

We can see from the most recent balance sheet that Golden Solar New Energy Technology Holdings had liabilities of CN¥224.8m falling due within a year, and liabilities of CN¥47.1m due beyond that. Offsetting these obligations, it had cash of CN¥81.0m as well as receivables valued at CN¥110.1m due within 12 months. So its liabilities total CN¥80.8m more than the combination of its cash and short-term receivables.

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¥4.51b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Golden Solar New Energy Technology Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Golden Solar New Energy Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.6%, to CN¥267m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Golden Solar New Energy Technology Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥360m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥252m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Golden Solar New Energy Technology Holdings has 3 warning signs (and 2 which are significant) 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.