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. As with many other companies Jiangsu Haili Wind Power Equipment Technology Co., Ltd. (SZSE:301155) makes use of debt. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Jiangsu Haili Wind Power Equipment Technology's Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Jiangsu Haili Wind Power Equipment Technology had debt of CN¥615.4m, up from CN¥236.8m in one year. However, it does have CN¥1.03b in cash offsetting this, leading to net cash of CN¥411.4m.
How Strong Is Jiangsu Haili Wind Power Equipment Technology's Balance Sheet?
The latest balance sheet data shows that Jiangsu Haili Wind Power Equipment Technology had liabilities of CN¥1.72b due within a year, and liabilities of CN¥156.5m falling due after that. Offsetting these obligations, it had cash of CN¥1.03b as well as receivables valued at CN¥2.26b due within 12 months. So it can boast CN¥1.40b more liquid assets than total liabilities.
This surplus suggests that Jiangsu Haili Wind Power Equipment Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Haili Wind Power Equipment Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Haili Wind Power Equipment Technology 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.
In the last year Jiangsu Haili Wind Power Equipment Technology had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥2.0b. We would much prefer see growth.
So How Risky Is Jiangsu Haili Wind Power Equipment Technology?
Although Jiangsu Haili Wind Power Equipment Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥29m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example, we've discovered 2 warning signs for Jiangsu Haili Wind Power Equipment Technology (1 doesn't sit too well with us!) that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.