Shanghai Foreign Service Holding Group (SHSE:600662) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Shanghai Foreign Service Holding Group Co., Ltd. (SHSE:600662) makes use of debt. 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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shanghai Foreign Service Holding Group

What Is Shanghai Foreign Service Holding Group's Debt?

As you can see below, Shanghai Foreign Service Holding Group had CN¥805.7m of debt at September 2024, down from CN¥1.00b a year prior. But on the other hand it also has CN¥9.20b in cash, leading to a CN¥8.39b net cash position.

How Strong Is Shanghai Foreign Service Holding Group's Balance Sheet?

The latest balance sheet data shows that Shanghai Foreign Service Holding Group had liabilities of CN¥10.2b due within a year, and liabilities of CN¥137.1m falling due after that. Offsetting these obligations, it had cash of CN¥9.20b as well as receivables valued at CN¥2.71b due within 12 months. So it actually has CN¥1.59b more liquid assets than total liabilities.

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

On the other hand, Shanghai Foreign Service Holding Group saw its EBIT drop by 4.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shanghai Foreign Service Holding Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Foreign Service Holding Group 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. Over the most recent three years, Shanghai Foreign Service Holding Group recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Foreign Service Holding Group has net cash of CN¥8.39b, as well as more liquid assets than liabilities. So we don't think Shanghai Foreign Service Holding Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shanghai Foreign Service Holding Group you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.