Does Shanghai New Power Automotive Technology (SHSE:600841) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Shanghai New Power Automotive Technology Company Limited (SHSE:600841) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shanghai New Power Automotive Technology

What Is Shanghai New Power Automotive Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai New Power Automotive Technology had CN¥3.31b of debt in March 2024, down from CN¥4.11b, one year before. But it also has CN¥5.42b in cash to offset that, meaning it has CN¥2.11b net cash.

A Look At Shanghai New Power Automotive Technology's Liabilities

The latest balance sheet data shows that Shanghai New Power Automotive Technology had liabilities of CN¥11.5b due within a year, and liabilities of CN¥778.9m falling due after that. Offsetting this, it had CN¥5.42b in cash and CN¥5.18b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.68b.

This deficit isn't so bad because Shanghai New Power Automotive Technology is worth CN¥4.35b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Shanghai New Power Automotive Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shanghai New Power Automotive Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shanghai New Power Automotive Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to CN¥8.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Shanghai New Power Automotive Technology?

While Shanghai New Power Automotive Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥236m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Shanghai New Power Automotive Technology .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.