Is Golden Solar New Energy Technology Holdings (HKG:1121) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Golden Solar New Energy Technology Holdings Limited (HKG:1121) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Golden Solar New Energy Technology Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Golden Solar New Energy Technology Holdings had CN¥100.2m in debt in December 2024; about the same as the year before. On the flip side, it has CN¥33.2m in cash leading to net debt of about CN¥67.0m.

How Healthy Is Golden Solar New Energy Technology Holdings' Balance Sheet?

According to the last reported balance sheet, Golden Solar New Energy Technology Holdings had liabilities of CN¥277.6m due within 12 months, and liabilities of CN¥36.2m due beyond 12 months. On the other hand, it had cash of CN¥33.2m and CN¥186.5m worth of receivables due within a year. So its liabilities total CN¥94.1m more than the combination of its cash and short-term receivables.

Of course, Golden Solar New Energy Technology Holdings has a market capitalization of CN¥2.63b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Golden Solar New Energy Technology Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Golden Solar New Energy Technology Holdings

Over 12 months, Golden Solar New Energy Technology Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥254m, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

While Golden Solar New Energy Technology Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥281m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥80m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Golden Solar New Energy Technology Holdings is showing 2 warning signs in our investment analysis , you should know about...

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.