We Think Shanghai Foreign Service Holding Group (SHSE:600662) Can Stay On Top Of Its Debt

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.' 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. We note that Shanghai Foreign Service Holding Group Co., Ltd. (SHSE:600662) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Shanghai Foreign Service Holding Group

What Is Shanghai Foreign Service Holding Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Foreign Service Holding Group had CN¥805.7m of debt in September 2024, down from CN¥1.00b, one year before. But it also has CN¥9.20b in cash to offset that, meaning it has CN¥8.39b net cash.

How Healthy 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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 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¥8.39b, as well as more liquid assets than liabilities. So we don't think Shanghai Foreign Service Holding Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Shanghai Foreign Service Holding Group , and understanding them should be part of your investment process.

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.