These 4 Measures Indicate That SanFeng Intelligent Equipment Group (SZSE:300276) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 SanFeng Intelligent Equipment Group Co., Ltd. (SZSE:300276) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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, 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. 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 SanFeng Intelligent Equipment Group

How Much Debt Does SanFeng Intelligent Equipment Group Carry?

As you can see below, SanFeng Intelligent Equipment Group had CN¥179.5m of debt at March 2024, down from CN¥187.1m a year prior. However, it does have CN¥418.7m in cash offsetting this, leading to net cash of CN¥239.2m.

A Look At SanFeng Intelligent Equipment Group's Liabilities

Zooming in on the latest balance sheet data, we can see that SanFeng Intelligent Equipment Group had liabilities of CN¥2.73b due within 12 months and liabilities of CN¥24.8m due beyond that. Offsetting this, it had CN¥418.7m in cash and CN¥664.3m in receivables that were due within 12 months. So its liabilities total CN¥1.67b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because SanFeng Intelligent Equipment Group is worth CN¥4.50b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, SanFeng Intelligent Equipment Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, SanFeng Intelligent Equipment Group made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥5.0m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SanFeng Intelligent Equipment Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SanFeng Intelligent Equipment Group 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, SanFeng Intelligent Equipment Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While SanFeng Intelligent Equipment Group does have more liabilities than liquid assets, it also has net cash of CN¥239.2m. And it impressed us with free cash flow of CN¥197m, being 3,938% of its EBIT. So we don't have any problem with SanFeng Intelligent Equipment Group's use of debt. 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 example - SanFeng Intelligent Equipment Group has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.