Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Sieyuan Electric Co., Ltd. (SZSE:002028) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Sieyuan Electric
What Is Sieyuan Electric's Debt?
You can click the graphic below for the historical numbers, but it shows that Sieyuan Electric had CN¥91.7m of debt in September 2023, down from CN¥118.4m, one year before. However, it does have CN¥3.53b in cash offsetting this, leading to net cash of CN¥3.44b.
How Strong Is Sieyuan Electric's Balance Sheet?
We can see from the most recent balance sheet that Sieyuan Electric had liabilities of CN¥6.54b falling due within a year, and liabilities of CN¥180.3m due beyond that. Offsetting these obligations, it had cash of CN¥3.53b as well as receivables valued at CN¥6.39b due within 12 months. So it can boast CN¥3.19b more liquid assets than total liabilities.
This surplus suggests that Sieyuan Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sieyuan Electric boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Sieyuan Electric grew its EBIT by 38% 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 it is future earnings, more than anything, that will determine Sieyuan Electric'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. While Sieyuan Electric 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. In the last three years, Sieyuan Electric's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Sieyuan Electric has net cash of CN¥3.44b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So is Sieyuan Electric's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sieyuan Electric's earnings per share history for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.