Is Shanghai Cooltech Power (SZSE:300153) A Risky Investment?

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.' 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 Cooltech Power Co., Ltd. (SZSE:300153) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shanghai Cooltech Power

What Is Shanghai Cooltech Power's Net Debt?

As you can see below, Shanghai Cooltech Power had CN¥165.9m of debt at September 2024, down from CN¥178.2m a year prior. But on the other hand it also has CN¥525.1m in cash, leading to a CN¥359.3m net cash position.

How Healthy Is Shanghai Cooltech Power's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Cooltech Power had liabilities of CN¥948.2m falling due within a year, and liabilities of CN¥81.6m due beyond that. On the other hand, it had cash of CN¥525.1m and CN¥298.5m worth of receivables due within a year. So it has liabilities totalling CN¥206.1m more than its cash and near-term receivables, combined.

Having regard to Shanghai Cooltech Power's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥10.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Shanghai Cooltech Power boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shanghai Cooltech Power if management cannot prevent a repeat of the 23% 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 it is Shanghai Cooltech Power'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Cooltech Power 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. Happily for any shareholders, Shanghai Cooltech Power actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shanghai Cooltech Power has CN¥359.3m in net cash. And it impressed us with free cash flow of CN¥147m, being 462% of its EBIT. So we are not troubled with Shanghai Cooltech Power's debt use. 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 2 warning signs for Shanghai Cooltech Power (1 can't be ignored!) 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.