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. We can see that Jiawei Renewable Energy Co., Ltd. (SZSE:300317) does use debt in its business. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Jiawei Renewable Energy
What Is Jiawei Renewable Energy's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Jiawei Renewable Energy had debt of CN¥345.4m, up from CN¥97.3m in one year. However, it does have CN¥418.8m in cash offsetting this, leading to net cash of CN¥73.4m.
How Healthy Is Jiawei Renewable Energy's Balance Sheet?
We can see from the most recent balance sheet that Jiawei Renewable Energy had liabilities of CN¥656.8m falling due within a year, and liabilities of CN¥388.4m due beyond that. Offsetting these obligations, it had cash of CN¥418.8m as well as receivables valued at CN¥447.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥179.5m.
Given Jiawei Renewable Energy has a market capitalization of CN¥3.66b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jiawei Renewable Energy also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiawei Renewable Energy's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Jiawei Renewable Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to CN¥642m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Jiawei Renewable Energy?
While Jiawei Renewable Energy lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥17m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 1 warning sign for Jiawei Renewable Energy 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. 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.