We Think Shanghai STEP Electric (SZSE:002527) Has A Fair Chunk Of 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 Shanghai STEP Electric Corporation (SZSE:002527) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shanghai STEP Electric

What Is Shanghai STEP Electric's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai STEP Electric had CN¥1.44b of debt in March 2024, down from CN¥1.95b, one year before. However, it does have CN¥615.9m in cash offsetting this, leading to net debt of about CN¥822.4m.

How Strong Is Shanghai STEP Electric's Balance Sheet?

We can see from the most recent balance sheet that Shanghai STEP Electric had liabilities of CN¥1.89b falling due within a year, and liabilities of CN¥931.2m due beyond that. On the other hand, it had cash of CN¥615.9m and CN¥1.43b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥781.5m.

Of course, Shanghai STEP Electric has a market capitalization of CN¥4.37b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanghai STEP Electric's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Shanghai STEP Electric saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Shanghai STEP Electric produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥246m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥533m. So to be blunt we do think it is risky. 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 example, we've discovered 1 warning sign for Shanghai STEP Electric that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com