Xi'an Shaangu Power (SHSE:601369) Has A Pretty Healthy Balance Sheet

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.' 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 Xi'an Shaangu Power Co., Ltd. (SHSE:601369) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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

What Is Xi'an Shaangu Power's Net Debt?

As you can see below, at the end of March 2024, Xi'an Shaangu Power had CN¥5.48b of debt, up from CN¥4.62b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥13.7b in cash, so it actually has CN¥8.24b net cash.

How Strong 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¥16.0b due within 12 months and liabilities of CN¥1.33b due beyond that. Offsetting this, it had CN¥13.7b in cash and CN¥4.97b in receivables that were due within 12 months. So it can boast CN¥1.33b 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.

Xi'an Shaangu Power's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Xi'an Shaangu Power produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. 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¥8.24b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Xi'an Shaangu Power that you should be aware of.

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.

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