These 4 Measures Indicate That Shang Gong Group (SHSE:600843) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Shang Gong Group Co., Ltd. (SHSE:600843) makes use of debt. But should shareholders be worried about its use of debt?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shang Gong Group

How Much Debt Does Shang Gong Group Carry?

As you can see below, at the end of March 2024, Shang Gong Group had CN¥1.35b of debt, up from CN¥1.05b a year ago. Click the image for more detail. However, it does have CN¥1.48b in cash offsetting this, leading to net cash of CN¥137.1m.

A Look At Shang Gong Group's Liabilities

According to the last reported balance sheet, Shang Gong Group had liabilities of CN¥2.25b due within 12 months, and liabilities of CN¥586.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.48b as well as receivables valued at CN¥1.24b due within 12 months. So its liabilities total CN¥112.3m more than the combination of its cash and short-term receivables.

Given Shang Gong Group has a market capitalization of CN¥4.51b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Shang Gong Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Unfortunately, Shang Gong Group saw its EBIT slide 6.6% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. There's no doubt that we learn most about debt from the balance sheet. But it is Shang Gong Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shang Gong Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Shang Gong Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Shang Gong Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥137.1m. So while Shang Gong Group does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shang Gong Group (of which 2 are a bit unpleasant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com