Xinyi Solar Holdings (HKG:968) Has A Pretty Healthy Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Xinyi Solar Holdings Limited (HKG:968) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 Xinyi Solar Holdings had debt of HK$6.11b at the end of December 2020, a reduction from HK$6.68b over a year. However, it does have HK$9.51b in cash offsetting this, leading to net cash of HK$3.40b.

How Healthy Is Xinyi Solar Holdings' Balance Sheet?

We can see from the most recent balance sheet that Xinyi Solar Holdings had liabilities of HK$7.73b falling due within a year, and liabilities of HK$3.67b due beyond that. Offsetting this, it had HK$9.51b in cash and HK$8.98b in receivables that were due within 12 months. So it actually has HK$7.09b 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. Simply put, the fact that Xinyi Solar Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Xinyi Solar Holdings grew its EBIT by 78% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Xinyi Solar Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Xinyi Solar Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Xinyi Solar Holdings actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

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$3.40b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 78% over the last year. So is Xinyi Solar Holdings's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 3 warning signs for Xinyi Solar Holdings 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. 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.
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