Shanghai New Power Automotive Technology (SHSE:600841) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, Shanghai New Power Automotive Technology Company Limited (SHSE:600841) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shanghai New Power Automotive Technology

What Is Shanghai New Power Automotive Technology's Debt?

As you can see below, Shanghai New Power Automotive Technology had CN¥3.12b of debt at September 2024, down from CN¥3.58b a year prior. But on the other hand it also has CN¥4.70b in cash, leading to a CN¥1.58b net cash position.

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¥10.3b due within a year, and liabilities of CN¥570.6m falling due after that. Offsetting these obligations, it had cash of CN¥4.70b as well as receivables valued at CN¥4.00b due within 12 months. So it has liabilities totalling CN¥2.19b more than its cash and near-term receivables, combined.

Shanghai New Power Automotive Technology has a market capitalization of CN¥5.96b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Shanghai New Power Automotive Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai New Power Automotive Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shanghai New Power Automotive Technology had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥7.4b. That's not what we would hope to see.

So How Risky Is Shanghai New Power Automotive Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Shanghai New Power Automotive Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥598m of cash and made a loss of CN¥2.7b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.58b. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example - Shanghai New Power Automotive Technology has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.