Does Beijing Sanlian Hope Shin-Gosen Technical Service (SZSE:300384) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Beijing Sanlian Hope Shin-Gosen Technical Service Co., Ltd. (SZSE:300384) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Beijing Sanlian Hope Shin-Gosen Technical Service

What Is Beijing Sanlian Hope Shin-Gosen Technical Service's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing Sanlian Hope Shin-Gosen Technical Service had CN¥60.1m of debt in September 2023, down from CN¥196.2m, one year before. However, its balance sheet shows it holds CN¥1.96b in cash, so it actually has CN¥1.90b net cash.

How Healthy Is Beijing Sanlian Hope Shin-Gosen Technical Service's Balance Sheet?

We can see from the most recent balance sheet that Beijing Sanlian Hope Shin-Gosen Technical Service had liabilities of CN¥1.16b falling due within a year, and liabilities of CN¥87.2m due beyond that. Offsetting this, it had CN¥1.96b in cash and CN¥268.3m in receivables that were due within 12 months. So it actually has CN¥983.8m more liquid assets than total liabilities.

This excess liquidity suggests that Beijing Sanlian Hope Shin-Gosen Technical Service is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Beijing Sanlian Hope Shin-Gosen Technical Service boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Beijing Sanlian Hope Shin-Gosen Technical Service has boosted its EBIT by 45%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Beijing Sanlian Hope Shin-Gosen Technical Service can strengthen its balance sheet over time. 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. Beijing Sanlian Hope Shin-Gosen Technical Service 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, Beijing Sanlian Hope Shin-Gosen Technical Service actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Sanlian Hope Shin-Gosen Technical Service has CN¥1.90b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in CN¥96m. When it comes to Beijing Sanlian Hope Shin-Gosen Technical Service's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Beijing Sanlian Hope Shin-Gosen Technical Service has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.