Does Xinyi Solar Holdings (HKG:968) Have A Healthy Balance Sheet?

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. As with many other companies Xinyi Solar Holdings Limited (HKG:968) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Xinyi Solar Holdings

What Is Xinyi Solar Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Xinyi Solar Holdings had debt of HK$6.98b, up from HK$6.55b in one year. However, its balance sheet shows it holds HK$7.47b in cash, so it actually has HK$493.4m net cash.

A Look At Xinyi Solar Holdings' Liabilities

We can see from the most recent balance sheet that Xinyi Solar Holdings had liabilities of HK$9.96b falling due within a year, and liabilities of HK$3.71b due beyond that. On the other hand, it had cash of HK$7.47b and HK$10.7b worth of receivables due within a year. So it actually has HK$4.51b more liquid assets than total liabilities.

This surplus suggests that Xinyi Solar Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Xinyi Solar Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Xinyi Solar Holdings's load is not too heavy, because its EBIT was down 34% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Xinyi Solar Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Xinyi Solar Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Xinyi Solar Holdings barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xinyi Solar Holdings has net cash of HK$493.4m, as well as more liquid assets than liabilities. So we don't have any problem with Xinyi Solar Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Xinyi Solar Holdings is showing 1 warning sign in our investment analysis , 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.