Does LongiTech Smart Energy Holding (HKG:1281) Have A Healthy Balance Sheet?

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.' 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, LongiTech Smart Energy Holding Limited (HKG:1281) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for LongiTech Smart Energy Holding

What Is LongiTech Smart Energy Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that LongiTech Smart Energy Holding had CN¥223.2m of debt in June 2021, down from CN¥247.4m, one year before. But on the other hand it also has CN¥280.2m in cash, leading to a CN¥57.0m net cash position.

How Strong Is LongiTech Smart Energy Holding's Balance Sheet?

We can see from the most recent balance sheet that LongiTech Smart Energy Holding had liabilities of CN¥178.3m falling due within a year, and liabilities of CN¥224.0m due beyond that. Offsetting these obligations, it had cash of CN¥280.2m as well as receivables valued at CN¥426.8m due within 12 months. So it can boast CN¥304.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that LongiTech Smart Energy Holding's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, LongiTech Smart Energy Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, LongiTech Smart Energy Holding made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥28m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is LongiTech Smart Energy Holding'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While LongiTech Smart Energy Holding 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. Happily for any shareholders, LongiTech Smart Energy Holding actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that LongiTech Smart Energy Holding has net cash of CN¥57.0m and plenty of liquid assets. And it impressed us with free cash flow of CN¥189m, being 686% of its EBIT. So is LongiTech Smart Energy Holding's debt a risk? It doesn't seem so to us. 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 LongiTech Smart Energy Holding has 3 warning signs (and 1 which is a bit unpleasant) we think 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.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.