We Think Shanghai M&G Stationery (SHSE:603899) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Shanghai M&G Stationery Inc. (SHSE:603899) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Shanghai M&G Stationery

How Much Debt Does Shanghai M&G Stationery Carry?

As you can see below, at the end of June 2024, Shanghai M&G Stationery had CN¥285.9m of debt, up from CN¥241.8m a year ago. Click the image for more detail. However, it does have CN¥5.61b in cash offsetting this, leading to net cash of CN¥5.33b.

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

According to the last reported balance sheet, Shanghai M&G Stationery had liabilities of CN¥5.71b due within 12 months, and liabilities of CN¥430.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.61b as well as receivables valued at CN¥4.64b due within 12 months. So it actually has CN¥4.12b more liquid assets than total liabilities.

This surplus suggests that Shanghai M&G Stationery is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face 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!

And we also note warmly that Shanghai M&G Stationery grew its EBIT by 13% last year, making its debt load easier to handle. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai M&G Stationery has CN¥5.33b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.4b, being 109% of its EBIT. So we don't think Shanghai M&G Stationery's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shanghai M&G Stationery is showing 1 warning sign in our investment analysis , 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.

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.