Shanghai M&G Stationery (SHSE:603899) 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 M&G Stationery Inc. (SHSE:603899) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai M&G Stationery

What Is Shanghai M&G Stationery's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Shanghai M&G Stationery had debt of CN¥445.6m, up from CN¥411.8m in one year. However, its balance sheet shows it holds CN¥5.92b in cash, so it actually has CN¥5.47b net cash.

How Strong Is Shanghai M&G Stationery's Balance Sheet?

The latest balance sheet data shows that Shanghai M&G Stationery had liabilities of CN¥5.31b due within a year, and liabilities of CN¥415.4m falling due after that. Offsetting these obligations, it had cash of CN¥5.92b as well as receivables valued at CN¥3.92b due within 12 months. So it can boast CN¥4.11b more liquid assets than total liabilities.

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

Also positive, Shanghai M&G Stationery grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. 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 M&G Stationery's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai M&G Stationery 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. Over the last three years, Shanghai M&G Stationery recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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¥5.47b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.3b, being 96% of its EBIT. So we don't think Shanghai M&G Stationery'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. For example, we've discovered 1 warning sign for Shanghai M&G Stationery that you should be aware of before investing here.

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.

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.