Shanghai M&G Stationery (SHSE:603899) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Shanghai M&G Stationery Inc. (SHSE:603899) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shanghai M&G Stationery

What Is Shanghai M&G Stationery's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shanghai M&G Stationery had CN¥509.8m of debt, an increase on CN¥418.9m, over one year. But it also has CN¥6.43b in cash to offset that, meaning it has CN¥5.92b net cash.

A Look At Shanghai M&G Stationery's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai M&G Stationery had liabilities of CN¥5.92b due within 12 months and liabilities of CN¥430.9m due beyond that. On the other hand, it had cash of CN¥6.43b and CN¥4.41b worth of receivables due within a year. So it actually has CN¥4.49b more liquid assets than total liabilities.

It's good to see that Shanghai M&G Stationery has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shanghai M&G Stationery boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Shanghai M&G Stationery has increased its EBIT by 6.2% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shanghai M&G Stationery'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanghai M&G Stationery 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. Happily for any shareholders, Shanghai M&G Stationery 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

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai M&G Stationery has net cash of CN¥5.92b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.4b, being 110% of its EBIT. So is Shanghai M&G Stationery's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shanghai M&G Stationery's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.