These 4 Measures Indicate That Shanghai Bailian (Group) (SHSE:600827) Is Using Debt Reasonably Well

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 can see that Shanghai Bailian (Group) Co., Ltd. (SHSE:600827) does use debt in its business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shanghai Bailian (Group)

What Is Shanghai Bailian (Group)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shanghai Bailian (Group) had CN¥4.43b of debt, an increase on CN¥4.21b, over one year. However, its balance sheet shows it holds CN¥21.4b in cash, so it actually has CN¥17.0b net cash.

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

The latest balance sheet data shows that Shanghai Bailian (Group) had liabilities of CN¥24.9b due within a year, and liabilities of CN¥10.8b falling due after that. Offsetting these obligations, it had cash of CN¥21.4b as well as receivables valued at CN¥1.07b due within 12 months. So its liabilities total CN¥13.1b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥12.9b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Shanghai Bailian (Group) has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Even more impressive was the fact that Shanghai Bailian (Group) grew its EBIT by 352% over twelve months. That boost will make it even easier to pay down debt going forward. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Shanghai Bailian (Group)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥17.0b. The cherry on top was that in converted 549% of that EBIT to free cash flow, bringing in CN¥494m. So we are not troubled with Shanghai Bailian (Group)'s debt use. 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. Case in point: We've spotted 2 warning signs for Shanghai Bailian (Group) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com