Shanghai Phoenix Enterprise (Group) (SHSE:600679) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shanghai Phoenix Enterprise (Group) Co., Ltd. (SHSE:600679) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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)

What Is Shanghai Phoenix Enterprise (Group)'s Net Debt?

As you can see below, Shanghai Phoenix Enterprise (Group) had CN¥261.6m of debt at September 2024, down from CN¥351.4m a year prior. But on the other hand it also has CN¥1.03b in cash, leading to a CN¥769.9m net cash position.

How Strong 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¥911.3m due within 12 months and liabilities of CN¥239.5m due beyond that. On the other hand, it had cash of CN¥1.03b and CN¥557.8m worth of receivables due within a year. So it can boast CN¥438.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Phoenix Enterprise (Group) could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Better yet, Shanghai Phoenix Enterprise (Group) grew its EBIT by 699% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanghai Phoenix Enterprise (Group)'s earnings that will influence how the balance sheet holds up in the future. 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. While Shanghai Phoenix Enterprise (Group) 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. Over the last three years, Shanghai Phoenix Enterprise (Group) actually produced more free cash flow than EBIT. 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 Phoenix Enterprise (Group) has net cash of CN¥769.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥105m, being 156% of its EBIT. So is Shanghai Phoenix Enterprise (Group)'s debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shanghai Phoenix Enterprise (Group) (1 is a bit unpleasant) you should be aware of.

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.

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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.