Does Sichuan Energy Investment Development (HKG:1713) have a healthy track record?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Sichuan Energy Investment Development Co., Ltd. (HKG:1713) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
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How much debt does Sichuan Energy Investment Development have?
You can click on the graph below for historical figures, but it shows that in June 2022, Sichuan Energy Investment Development had a debt of 313.1 million Canadian yen, an increase from 300.0 million yen Canadians, over one year. However, he has 642.6 million National Yen in cash to offset this, resulting in a net cash of 329.4 million National Yen.
A look at the liabilities of Sichuan Energy Investment Development
We can see from the most recent balance sheet that Sichuan Energy Investment Development had liabilities of 1.45 billion yen due within one year, and liabilities of 362.2 million yen due beyond. On the other hand, it had cash of 642.6 million Canadian yen and 533.2 million national yen in receivables due within one year. Thus, its liabilities total 636.2 million Canadian yen more than the combination of its cash and short-term receivables.
That shortfall isn’t that bad, as Sichuan Energy Investment Development is worth C$1.44 billion and could therefore likely raise enough capital to shore up its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky. While it has liabilities worth noting, Sichuan Energy Investment Development also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Fortunately, Sichuan Energy Investment Development has increased its EBIT by 2.3% over the past year, making this debt even more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Sichuan Energy Investment Development will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Finally, while the taxman may love accounting profits, lenders only accept cash. Although Sichuan Energy Investment Development has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) this cash balance. Over the past three years, Sichuan Energy Investment Development has recorded free cash flow of 27% of its EBIT, which is lower than expected. It’s not great when it comes to paying off debt.
Although Sichuan Energy Investment Development has more liabilities than liquid assets, it also has a net cash position of 329.4 million Canadian yen. On top of that, it has increased its EBIT by 2.3% over the last twelve months. So we have no problem with the use of debt by Sichuan Energy Investment Development. 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 outside of the balance sheet. For example, we have identified 1 Sichuan Power Investment Development Warning Sign of which you should be aware.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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