Is Shanghai Yanhua Smartech Group (SZSE:002178) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Shanghai Yanhua Smartech Group Co., Ltd. (SZSE:002178) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shanghai Yanhua Smartech Group

How Much Debt Does Shanghai Yanhua Smartech Group Carry?

As you can see below, Shanghai Yanhua Smartech Group had CN¥109.5m of debt at September 2024, down from CN¥164.8m a year prior. But it also has CN¥136.8m in cash to offset that, meaning it has CN¥27.3m net cash.

How Healthy Is Shanghai Yanhua Smartech Group's Balance Sheet?

According to the last reported balance sheet, Shanghai Yanhua Smartech Group had liabilities of CN¥741.6m due within 12 months, and liabilities of CN¥79.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥136.8m as well as receivables valued at CN¥669.9m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Shanghai Yanhua Smartech Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥5.23b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Shanghai Yanhua Smartech Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shanghai Yanhua Smartech Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shanghai Yanhua Smartech Group had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥619m. We would much prefer see growth.

So How Risky Is Shanghai Yanhua Smartech Group?

Although Shanghai Yanhua Smartech Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥5.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shanghai Yanhua Smartech Group (1 is a bit unpleasant) 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.