Is Solargiga Energy Holdings (HKG:757) A Risky Investment?

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.' 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 Solargiga Energy Holdings Limited (HKG:757) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Solargiga Energy Holdings

What Is Solargiga Energy Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Solargiga Energy Holdings had CN¥1.43b of debt, an increase on CN¥1.34b, over one year. However, it also had CN¥578.4m in cash, and so its net debt is CN¥852.9m.

How Healthy Is Solargiga Energy Holdings' Balance Sheet?

We can see from the most recent balance sheet that Solargiga Energy Holdings had liabilities of CN¥4.12b falling due within a year, and liabilities of CN¥353.3m due beyond that. Offsetting this, it had CN¥578.4m in cash and CN¥2.28b in receivables that were due within 12 months. So its liabilities total CN¥1.62b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥423.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Solargiga Energy Holdings would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While Solargiga Energy Holdings has a quite reasonable net debt to EBITDA multiple of 2.1, its interest cover seems weak, at 2.5. In large part that's it has so much depreciation and amortisation. These charges may be non-cash, so they could be excluded when it comes to paying down debt. But the accounting charges are there for a reason -- some assets are seen to be losing value. Either way there's no doubt the stock is using meaningful leverage. Notably, Solargiga Energy Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥91m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Solargiga Energy Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Considering the last year, Solargiga Energy Holdings actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

We'd go so far as to say Solargiga Energy Holdings's level of total liabilities was disappointing. Having said that, its ability to grow its EBIT isn't such a worry. After considering the datapoints discussed, we think Solargiga Energy Holdings has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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 2 warning signs for Solargiga Energy Holdings (1 shouldn't be ignored) you should be aware of.

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.

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.