Shanghai Xinpeng IndustryLtd (SZSE:002328) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, Shanghai Xinpeng Industry Co.,Ltd. (SZSE:002328) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shanghai Xinpeng IndustryLtd

What Is Shanghai Xinpeng IndustryLtd's Net Debt?

As you can see below, Shanghai Xinpeng IndustryLtd had CN¥438.4m of debt at September 2024, down from CN¥480.0m a year prior. However, its balance sheet shows it holds CN¥1.79b in cash, so it actually has CN¥1.35b net cash.

How Healthy Is Shanghai Xinpeng IndustryLtd's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Xinpeng IndustryLtd had liabilities of CN¥1.62b falling due within a year, and liabilities of CN¥554.5m due beyond that. Offsetting this, it had CN¥1.79b in cash and CN¥771.5m in receivables that were due within 12 months. So it can boast CN¥387.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Xinpeng IndustryLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Xinpeng IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Shanghai Xinpeng IndustryLtd's load is not too heavy, because its EBIT was down 42% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Xinpeng IndustryLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanghai Xinpeng IndustryLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Shanghai Xinpeng IndustryLtd produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Xinpeng IndustryLtd has net cash of CN¥1.35b, as well as more liquid assets than liabilities. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in CN¥626m. So we are not troubled with Shanghai Xinpeng IndustryLtd's debt use. 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. For instance, we've identified 2 warning signs for Shanghai Xinpeng IndustryLtd that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.