China Shipbuilding Industry Group Power (SHSE:600482) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, China Shipbuilding Industry Group Power Co., Ltd. (SHSE:600482) does carry debt. But the more important question is: how much risk is that debt creating?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 China Shipbuilding Industry Group Power

What Is China Shipbuilding Industry Group Power's Net Debt?

As you can see below, China Shipbuilding Industry Group Power had CN¥9.36b of debt at June 2024, down from CN¥10.3b a year prior. But it also has CN¥30.6b in cash to offset that, meaning it has CN¥21.2b net cash.

A Look At China Shipbuilding Industry Group Power's Liabilities

The latest balance sheet data shows that China Shipbuilding Industry Group Power had liabilities of CN¥44.5b due within a year, and liabilities of CN¥9.95b falling due after that. On the other hand, it had cash of CN¥30.6b and CN¥21.7b worth of receivables due within a year. So its liabilities total CN¥2.15b 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¥51.7b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, China Shipbuilding Industry Group Power also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, China Shipbuilding Industry Group Power grew its EBIT by 974% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine China Shipbuilding Industry Group Power's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China Shipbuilding Industry Group Power 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. Over the last two years, China Shipbuilding Industry Group Power actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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¥21.2b. And it impressed us with free cash flow of CN¥7.0b, being 995% of its EBIT. So is China Shipbuilding Industry Group Power's debt a risk? It doesn't seem so to us. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.