These 4 Measures Indicate That Xi'an Shaangu Power (SHSE:601369) Is Using Debt Safely

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 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. We note that Xi'an Shaangu Power Co., Ltd. (SHSE:601369) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Xi'an Shaangu Power

How Much Debt Does Xi'an Shaangu Power Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Xi'an Shaangu Power had CN¥5.04b of debt, an increase on CN¥4.15b, over one year. But on the other hand it also has CN¥13.1b in cash, leading to a CN¥8.03b net cash position.

How Healthy Is Xi'an Shaangu Power's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xi'an Shaangu Power had liabilities of CN¥15.9b due within 12 months and liabilities of CN¥1.20b due beyond that. Offsetting these obligations, it had cash of CN¥13.1b as well as receivables valued at CN¥5.69b due within 12 months. So it can boast CN¥1.67b more liquid assets than total liabilities.

This surplus suggests that Xi'an Shaangu Power has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Xi'an Shaangu Power has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Xi'an Shaangu Power grew its EBIT by 6.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Xi'an Shaangu 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Xi'an Shaangu Power 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. Over the most recent three years, Xi'an Shaangu Power recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xi'an Shaangu Power has net cash of CN¥8.03b, as well as more liquid assets than liabilities. So is Xi'an Shaangu Power's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Xi'an Shaangu Power that you should be aware of before investing here.

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.