Is China Shipbuilding Industry Group Power (SHSE:600482) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that China Shipbuilding Industry Group Power Co., Ltd. (SHSE:600482) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Shipbuilding Industry Group Power

How Much Debt Does China Shipbuilding Industry Group Power Carry?

The image below, which you can click on for greater detail, shows that at September 2023 China Shipbuilding Industry Group Power had debt of CN¥10.7b, up from CN¥8.48b in one year. But on the other hand it also has CN¥25.2b in cash, leading to a CN¥14.5b net cash position.

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

According to the last reported balance sheet, China Shipbuilding Industry Group Power had liabilities of CN¥37.1b due within 12 months, and liabilities of CN¥12.9b due beyond 12 months. On the other hand, it had cash of CN¥25.2b and CN¥22.5b worth of receivables due within a year. So it has liabilities totalling CN¥2.36b more than its cash and near-term receivables, combined.

Of course, China Shipbuilding Industry Group Power has a market capitalization of CN¥43.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, China Shipbuilding Industry Group Power reported revenue of CN¥42b, which is a gain of 5.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is China Shipbuilding Industry Group Power?

Although China Shipbuilding Industry Group Power had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥443m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example, we've discovered 1 warning sign for China Shipbuilding Industry Group Power that you should be aware of before investing here.

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.