These 4 Measures Indicate That Shanghai Liangxin ElectricalLTD (SZSE:002706) Is Using Debt Reasonably Well

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. We can see that Shanghai Liangxin Electrical Co.,LTD. (SZSE:002706) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shanghai Liangxin ElectricalLTD

What Is Shanghai Liangxin ElectricalLTD's Net Debt?

The image below, which you can click on for greater detail, shows that Shanghai Liangxin ElectricalLTD had debt of CN¥52.5m at the end of September 2024, a reduction from CN¥102.1m over a year. But on the other hand it also has CN¥972.6m in cash, leading to a CN¥920.1m net cash position.

How Strong Is Shanghai Liangxin ElectricalLTD's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Liangxin ElectricalLTD had liabilities of CN¥1.40b falling due within a year, and liabilities of CN¥51.8m due beyond that. On the other hand, it had cash of CN¥972.6m and CN¥1.34b worth of receivables due within a year. So it can boast CN¥864.4m more liquid assets than total liabilities.

This surplus suggests that Shanghai Liangxin ElectricalLTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Liangxin ElectricalLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Shanghai Liangxin ElectricalLTD saw its EBIT drop by 5.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Liangxin ElectricalLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanghai Liangxin ElectricalLTD has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Shanghai Liangxin ElectricalLTD recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Liangxin ElectricalLTD has CN¥920.1m in net cash and a decent-looking balance sheet. So we don't have any problem with Shanghai Liangxin ElectricalLTD's use of debt. 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. Be aware that Shanghai Liangxin ElectricalLTD is showing 1 warning sign in our investment analysis , you should know about...

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.