Here's Why Shanghai Ganglian E-Commerce Holdings (SZSE:300226) Can Manage Its Debt Responsibly

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.' 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 Ganglian E-Commerce Holdings Co., Ltd. (SZSE:300226) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shanghai Ganglian E-Commerce Holdings

How Much Debt Does Shanghai Ganglian E-Commerce Holdings Carry?

As you can see below, at the end of September 2024, Shanghai Ganglian E-Commerce Holdings had CN¥6.98b of debt, up from CN¥2.92b a year ago. Click the image for more detail. However, it does have CN¥12.5b in cash offsetting this, leading to net cash of CN¥5.47b.

How Healthy Is Shanghai Ganglian E-Commerce Holdings' Balance Sheet?

The latest balance sheet data shows that Shanghai Ganglian E-Commerce Holdings had liabilities of CN¥17.7b due within a year, and liabilities of CN¥35.1m falling due after that. Offsetting these obligations, it had cash of CN¥12.5b as well as receivables valued at CN¥1.69b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.58b.

While this might seem like a lot, it is not so bad since Shanghai Ganglian E-Commerce Holdings has a market capitalization of CN¥7.90b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Shanghai Ganglian E-Commerce Holdings 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 Ganglian E-Commerce Holdings if management cannot prevent a repeat of the 48% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Ganglian E-Commerce Holdings 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, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai Ganglian E-Commerce Holdings 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 Ganglian E-Commerce Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Shanghai Ganglian E-Commerce Holdings does have more liabilities than liquid assets, it also has net cash of CN¥5.47b. And it impressed us with free cash flow of CN¥2.1b, being 399% of its EBIT. So we don't have any problem with Shanghai Ganglian E-Commerce Holdings's use of debt. 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 Ganglian E-Commerce Holdings that you should be aware of.

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.

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

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.