Is China Suntien Green Energy (HKG: 956) Using Too Much Debt?
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that China Suntien Green Energy Corporation Limited (HKG: 956) uses debt in its business. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for China Suntien Green Energy
What is the debt of China Suntien Green Energy?
You can click on the graph below for historical figures, but it shows that as of June 2021, China Suntien Green Energy had a debt of CN 33.7 billion, an increase from CN 27.2 billion. , over one year. However, given that it has a cash reserve of CN 3.06 billion, its net debt is less, at around CN 30.6 billion.
How strong is China Suntien Green Energy’s balance sheet?
The most recent balance sheet shows that China Suntien Green Energy had CN 15.5 billion in liabilities maturing within one year and CN 28.9 billion in liabilities beyond. On the other hand, he had CN 3.06 billion in cash and CN 6.89 billion in receivables due within one year. It therefore has liabilities totaling CN 34.5 billion more than its cash and short-term receivables combined.
This deficit is substantial compared to its market capitalization of CN 53.9 billion, so he suggests shareholders keep an eye on China Suntien Green Energy’s use of debt. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
As it turns out, China Suntien Green Energy has a rather worrying net debt to EBITDA ratio of 5.5 but very strong interest coverage of 1k. So either he has access to very cheap long-term debt or his interest charges will go up! It is important to note that China Suntien Green Energy has increased its EBIT by 38% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future earnings, more than anything, that will determine China Suntien Green Energy’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. In the past three years, China Suntien Green Energy has recorded substantial negative free cash flow overall. While this may be the result of spending on growth, it makes debt much riskier.
Our point of view
We feel some apprehension about the difficulty of converting EBIT to free cash flow from China Suntien Green Energy, but we also have some bright spots to focus on. Its interest coverage and EBIT growth rate are encouraging signs. We think China Suntien Green Energy’s debt makes it a bit risky, after looking at the aforementioned data points together. Not all risks are bad, as they can increase stock price returns if they are profitable, but this risk of leverage is worth keeping in mind. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for China Suntien Green Energy (1 cannot be ignored!) Which you should be aware of before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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