Does Sichuan Energy Investment Development (HKG:1713) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Sichuan Energy Investment Development Co., Ltd. (HKG:1713) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sichuan Energy Investment Development

What Is Sichuan Energy Investment Development's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Sichuan Energy Investment Development had CN¥313.1m of debt, an increase on CN¥300.0m, over one year. However, it does have CN¥642.6m in cash offsetting this, leading to net cash of CN¥329.4m.

A Look At Sichuan Energy Investment Development's Liabilities

We can see from the most recent balance sheet that Sichuan Energy Investment Development had liabilities of CN¥1.45b falling due within a year, and liabilities of CN¥362.2m due beyond that. On the other hand, it had cash of CN¥642.6m and CN¥533.2m worth of receivables due within a year. So its liabilities total CN¥636.2m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Sichuan Energy Investment Development is worth CN¥1.44b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Sichuan Energy Investment Development also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Sichuan Energy Investment Development grew its EBIT by 2.3% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sichuan Energy Investment Development will need earnings to service that debt. 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 Sichuan Energy Investment Development 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. Looking at the most recent three years, Sichuan Energy Investment Development recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Sichuan Energy Investment Development does have more liabilities than liquid assets, it also has net cash of CN¥329.4m. On top of that, it increased its EBIT by 2.3% in the last twelve months. So we don't have any problem with Sichuan Energy Investment Development's use of debt. 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 1 warning sign for Sichuan Energy Investment Development that 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.

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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.