Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Xinyi Solar Holdings Limited (HKG:968) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Xinyi Solar Holdings

What Is Xinyi Solar Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Xinyi Solar Holdings had HK$6.98b of debt, an increase on HK$6.55b, over one year. But on the other hand it also has HK$7.47b in cash, leading to a HK$493.4m net cash position.

How Strong Is Xinyi Solar Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xinyi Solar Holdings had liabilities of HK$9.96b due within 12 months and liabilities of HK$3.71b due beyond that. Offsetting these obligations, it had cash of HK$7.47b as well as receivables valued at HK$10.7b due within 12 months. So it actually has HK$4.51b more liquid assets than total liabilities.

This short term liquidity is a sign that Xinyi Solar Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xinyi Solar Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Xinyi Solar Holdings's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Xinyi Solar Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 it is always sensible to investigate a company's debt, in this case Xinyi Solar Holdings has HK$493.4m in net cash and a decent-looking balance sheet. So we don't have any problem with Xinyi Solar Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Xinyi Solar Holdings , and understanding them should be part of your investment process.

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.