Shanghai Foreign Service Holding Group (SHSE:600662) Has A Rock Solid 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.' 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. 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai Foreign Service Holding Group

What Is Shanghai Foreign Service Holding Group's Net Debt?

As you can see below, Shanghai Foreign Service Holding Group had CN¥735.0m of debt at March 2024, down from CN¥1.01b a year prior. But on the other hand it also has CN¥8.97b in cash, leading to a CN¥8.23b net cash position.

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

We can see from the most recent balance sheet that Shanghai Foreign Service Holding Group had liabilities of CN¥10.6b falling due within a year, and liabilities of CN¥117.8m due beyond that. Offsetting this, it had CN¥8.97b in cash and CN¥3.16b in receivables that were due within 12 months. So it can boast CN¥1.39b more liquid assets than total liabilities.

It's good to see that Shanghai Foreign Service Holding Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Shanghai Foreign Service Holding Group has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Shanghai Foreign Service Holding Group has increased its EBIT by 8.5% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shanghai Foreign Service Holding Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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¥8.23b, as well as more liquid assets than liabilities. So we don't think Shanghai Foreign Service Holding Group's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Shanghai Foreign Service Holding Group .

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.

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