Here's Why Shanghai Phoenix Enterprise (Group) (SHSE:600679) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Shanghai Phoenix Enterprise (Group) Co., Ltd. (SHSE:600679) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shanghai Phoenix Enterprise (Group)

How Much Debt Does Shanghai Phoenix Enterprise (Group) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shanghai Phoenix Enterprise (Group) had CN¥351.4m of debt, an increase on CN¥110.2m, over one year. But on the other hand it also has CN¥943.7m in cash, leading to a CN¥592.3m net cash position.

How Healthy Is Shanghai Phoenix Enterprise (Group)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Phoenix Enterprise (Group) had liabilities of CN¥967.3m due within 12 months and liabilities of CN¥133.2m due beyond that. Offsetting these obligations, it had cash of CN¥943.7m as well as receivables valued at CN¥450.0m due within 12 months. So it can boast CN¥293.2m more liquid assets than total liabilities.

This surplus suggests that Shanghai Phoenix Enterprise (Group) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shanghai Phoenix Enterprise (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shanghai Phoenix Enterprise (Group)'s load is not too heavy, because its EBIT was down 97% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shanghai Phoenix Enterprise (Group) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shanghai Phoenix Enterprise (Group) 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 Phoenix Enterprise (Group) recorded free cash flow worth a fulsome 84% 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 it is always sensible to investigate a company's debt, in this case Shanghai Phoenix Enterprise (Group) has CN¥592.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥30m, being 84% of its EBIT. So we are not troubled with Shanghai Phoenix Enterprise (Group)'s debt use. 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. Be aware that Shanghai Phoenix Enterprise (Group) is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.