Shanghai Moons' Electric (SHSE:603728) Has A Somewhat Strained Balance Sheet

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. We note that Shanghai Moons' Electric Co., Ltd. (SHSE:603728) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shanghai Moons' Electric

How Much Debt Does Shanghai Moons' Electric Carry?

As you can see below, at the end of September 2024, Shanghai Moons' Electric had CN¥375.7m of debt, up from CN¥219.0m a year ago. Click the image for more detail. However, it does have CN¥770.4m in cash offsetting this, leading to net cash of CN¥394.7m.

How Healthy Is Shanghai Moons' Electric's Balance Sheet?

According to the last reported balance sheet, Shanghai Moons' Electric had liabilities of CN¥976.0m due within 12 months, and liabilities of CN¥107.7m due beyond 12 months. On the other hand, it had cash of CN¥770.4m and CN¥814.8m worth of receivables due within a year. So it can boast CN¥501.5m more liquid assets than total liabilities.

This state of affairs indicates that Shanghai Moons' Electric's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥31.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Shanghai Moons' Electric has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Shanghai Moons' Electric if management cannot prevent a repeat of the 55% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shanghai Moons' Electric can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanghai Moons' Electric 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, Shanghai Moons' Electric recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Moons' Electric has net cash of CN¥394.7m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Shanghai Moons' Electric's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Shanghai Moons' Electric that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.