China Shipbuilding Industry Group Power (SHSE:600482) Could Easily Take On More Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies China Shipbuilding Industry Group Power Co., Ltd. (SHSE:600482) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Shipbuilding Industry Group Power

What Is China Shipbuilding Industry Group Power's Debt?

The image below, which you can click on for greater detail, shows that China Shipbuilding Industry Group Power had debt of CN¥10.2b at the end of March 2024, a reduction from CN¥10.7b over a year. However, its balance sheet shows it holds CN¥28.8b in cash, so it actually has CN¥18.6b net cash.

How Healthy Is China Shipbuilding Industry Group Power's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Shipbuilding Industry Group Power had liabilities of CN¥40.8b due within 12 months and liabilities of CN¥11.9b due beyond that. Offsetting these obligations, it had cash of CN¥28.8b as well as receivables valued at CN¥21.0b due within 12 months. So its liabilities total CN¥2.87b more than the combination of its cash and short-term receivables.

Since publicly traded China Shipbuilding Industry Group Power shares are worth a total of CN¥43.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, China Shipbuilding Industry Group Power boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, China Shipbuilding Industry Group Power turned things around in the last 12 months, delivering and EBIT of CN¥699m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Shipbuilding Industry Group Power 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Shipbuilding Industry Group Power may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, China Shipbuilding Industry Group Power actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about China Shipbuilding Industry Group Power's liabilities, but we can be reassured by the fact it has has net cash of CN¥18.6b. The cherry on top was that in converted 761% of that EBIT to free cash flow, bringing in CN¥5.3b. So we don't think China Shipbuilding Industry Group Power's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of China Shipbuilding Industry Group Power's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com