Xi'an Shaangu Power (SHSE:601369) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Xi'an Shaangu Power Co., Ltd. (SHSE:601369) makes use of 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. 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. 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.

Check out our latest analysis for Xi'an Shaangu Power

What Is Xi'an Shaangu Power's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Xi'an Shaangu Power had debt of CN¥4.71b, up from CN¥3.68b in one year. But it also has CN¥12.9b in cash to offset that, meaning it has CN¥8.22b net cash.

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

According to the last reported balance sheet, Xi'an Shaangu Power had liabilities of CN¥15.9b due within 12 months, and liabilities of CN¥973.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥12.9b as well as receivables valued at CN¥5.22b due within 12 months. So it actually has CN¥1.32b 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. Succinctly put, Xi'an Shaangu Power boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Xi'an Shaangu Power grew its EBIT by 19% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Xi'an Shaangu Power 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 most recent three years, Xi'an Shaangu Power recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xi'an Shaangu Power has CN¥8.22b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in CN¥793m. So we don't think Xi'an Shaangu Power's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Xi'an Shaangu Power you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.