Shanghai Mechanical & Electrical IndustryLtd (SHSE:600835) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shanghai Mechanical & Electrical Industry Co.,Ltd. (SHSE:600835) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shanghai Mechanical & Electrical IndustryLtd

What Is Shanghai Mechanical & Electrical IndustryLtd's Net Debt?

As you can see below, at the end of March 2024, Shanghai Mechanical & Electrical IndustryLtd had CN¥61.3m of debt, up from CN¥56.0m a year ago. Click the image for more detail. But it also has CN¥12.8b in cash to offset that, meaning it has CN¥12.8b net cash.

How Healthy Is Shanghai Mechanical & Electrical IndustryLtd's Balance Sheet?

According to the last reported balance sheet, Shanghai Mechanical & Electrical IndustryLtd had liabilities of CN¥20.6b due within 12 months, and liabilities of CN¥374.7m due beyond 12 months. On the other hand, it had cash of CN¥12.8b and CN¥6.89b worth of receivables due within a year. So it has liabilities totalling CN¥1.24b more than its cash and near-term receivables, combined.

Given Shanghai Mechanical & Electrical IndustryLtd has a market capitalization of CN¥11.1b, it's hard to believe these liabilities pose much 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, Shanghai Mechanical & Electrical IndustryLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shanghai Mechanical & Electrical IndustryLtd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Mechanical & Electrical IndustryLtd 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. While Shanghai Mechanical & Electrical 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. Happily for any shareholders, Shanghai Mechanical & Electrical IndustryLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Shanghai Mechanical & Electrical IndustryLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥12.8b. And it impressed us with free cash flow of CN¥936m, being 116% of its EBIT. So we don't think Shanghai Mechanical & Electrical IndustryLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shanghai Mechanical & Electrical IndustryLtd that you should be aware of.

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.