Health Check: How Prudently Does China Shipbuilding Industry (SHSE:601989) Use Debt?

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 can see that China Shipbuilding Industry Company Limited (SHSE:601989) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China Shipbuilding Industry

What Is China Shipbuilding Industry's Debt?

The chart below, which you can click on for greater detail, shows that China Shipbuilding Industry had CN¥24.9b in debt in March 2024; about the same as the year before. But it also has CN¥72.4b in cash to offset that, meaning it has CN¥47.4b net cash.

How Healthy Is China Shipbuilding Industry's Balance Sheet?

According to the last reported balance sheet, China Shipbuilding Industry had liabilities of CN¥90.6b due within 12 months, and liabilities of CN¥23.1b due beyond 12 months. On the other hand, it had cash of CN¥72.4b and CN¥17.7b worth of receivables due within a year. So it has liabilities totalling CN¥23.6b more than its cash and near-term receivables, combined.

China Shipbuilding Industry has a very large market capitalization of CN¥114.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, China Shipbuilding Industry also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Shipbuilding Industry'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.

In the last year China Shipbuilding Industry wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥50b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is China Shipbuilding Industry?

Although China Shipbuilding Industry had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥4.7b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for China Shipbuilding Industry (1 is a bit concerning) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.