Is Shanghai Ganglian E-Commerce Holdings (SZSE:300226) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shanghai Ganglian E-Commerce Holdings Co., Ltd. (SZSE:300226) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

What Is Shanghai Ganglian E-Commerce Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shanghai Ganglian E-Commerce Holdings had debt of CN¥6.98b, up from CN¥2.92b in one year. However, its balance sheet shows it holds CN¥12.5b in cash, so it actually has CN¥5.47b net cash.

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 it has liabilities totalling CN¥3.58b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shanghai Ganglian E-Commerce Holdings is worth CN¥8.14b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Shanghai Ganglian E-Commerce Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Shanghai Ganglian E-Commerce Holdings's saving grace is its low debt levels, because its EBIT has tanked 48% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Shanghai Ganglian E-Commerce Holdings 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

Although Shanghai Ganglian E-Commerce Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it 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 are not troubled with Shanghai Ganglian E-Commerce Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Shanghai Ganglian E-Commerce Holdings that 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.