Is Songcheng Performance DevelopmentLtd (SZSE:300144) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Songcheng Performance Development Co.,Ltd (SZSE:300144) does have debt on its balance sheet. 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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Songcheng Performance DevelopmentLtd

How Much Debt Does Songcheng Performance DevelopmentLtd Carry?

As you can see below, Songcheng Performance DevelopmentLtd had CN¥129.1m of debt at September 2024, down from CN¥307.2m a year prior. However, its balance sheet shows it holds CN¥3.97b in cash, so it actually has CN¥3.84b net cash.

A Look At Songcheng Performance DevelopmentLtd's Liabilities

The latest balance sheet data shows that Songcheng Performance DevelopmentLtd had liabilities of CN¥700.7m due within a year, and liabilities of CN¥746.6m falling due after that. On the other hand, it had cash of CN¥3.97b and CN¥22.5m worth of receivables due within a year. So it can boast CN¥2.55b more liquid assets than total liabilities.

This short term liquidity is a sign that Songcheng Performance DevelopmentLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Songcheng Performance DevelopmentLtd 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 Songcheng Performance DevelopmentLtd has boosted its EBIT by 39%, 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 Songcheng Performance DevelopmentLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Songcheng Performance DevelopmentLtd 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, Songcheng Performance DevelopmentLtd actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Songcheng Performance DevelopmentLtd has net cash of CN¥3.84b, as well as more liquid assets than liabilities. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in CN¥1.1b. So we don't think Songcheng Performance DevelopmentLtd's use of debt is risky. 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. We've identified 3 warning signs with Songcheng Performance DevelopmentLtd , and understanding them should be part of your investment process.

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.