Is Shanghai Bailian (Group) (SHSE:600827) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Shanghai Bailian (Group) Co., Ltd. (SHSE:600827) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shanghai Bailian (Group)

How Much Debt Does Shanghai Bailian (Group) Carry?

The chart below, which you can click on for greater detail, shows that Shanghai Bailian (Group) had CN¥4.06b in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥22.4b in cash, leading to a CN¥18.3b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Shanghai Bailian (Group) had liabilities of CN¥24.4b due within 12 months and liabilities of CN¥10.5b due beyond that. On the other hand, it had cash of CN¥22.4b and CN¥944.8m worth of receivables due within a year. So it has liabilities totalling CN¥11.6b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥16.5b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Shanghai Bailian (Group) also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Shanghai Bailian (Group)'s load is not too heavy, because its EBIT was down 92% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Bailian (Group)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shanghai Bailian (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. Happily for any shareholders, Shanghai Bailian (Group) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Shanghai Bailian (Group) does have more liabilities than liquid assets, it also has net cash of CN¥18.3b. And it impressed us with free cash flow of CN¥1.3b, being 950% of its EBIT. So we don't have any problem with Shanghai Bailian (Group)'s use of debt. 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. We've identified 2 warning signs with Shanghai Bailian (Group) (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.