Is Golden Solar New Energy Technology Holdings (HKG:1121) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Golden Solar New Energy Technology Holdings Limited (HKG:1121) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

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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 Golden Solar New Energy Technology Holdings had CN¥91.0m of debt in June 2022, down from CN¥102.9m, one year before. But it also has CN¥482.4m in cash to offset that, meaning it has CN¥391.4m net cash.

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

We can see from the most recent balance sheet that Golden Solar New Energy Technology Holdings had liabilities of CN¥181.9m falling due within a year, and liabilities of CN¥20.4m due beyond that. Offsetting this, it had CN¥482.4m in cash and CN¥51.6m in receivables that were due within 12 months. So it actually has CN¥331.8m more liquid assets than total liabilities.

This surplus suggests that Golden Solar New Energy Technology Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Golden Solar New Energy Technology 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, Golden Solar New Energy Technology Holdings reported revenue of CN¥286m, which is a gain of 27%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Golden Solar New Energy Technology Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Golden Solar New Energy Technology Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥130m and booked a CN¥91m accounting loss. Given it only has net cash of CN¥391.4m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Golden Solar New Energy Technology Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 instance, we've identified 1 warning sign for Golden Solar New Energy Technology Holdings that you should be aware of.

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.