Does Shanghai Milkground Food Tech (SHSE:600882) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Shanghai Milkground Food Tech Co., Ltd (SHSE:600882) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shanghai Milkground Food Tech

What Is Shanghai Milkground Food Tech's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Shanghai Milkground Food Tech had debt of CN¥1.40b, up from CN¥1.26b in one year. However, it does have CN¥2.56b in cash offsetting this, leading to net cash of CN¥1.16b.

A Look At Shanghai Milkground Food Tech's Liabilities

According to the last reported balance sheet, Shanghai Milkground Food Tech had liabilities of CN¥1.66b due within 12 months, and liabilities of CN¥782.3m due beyond 12 months. On the other hand, it had cash of CN¥2.56b and CN¥130.5m worth of receivables due within a year. So it can boast CN¥243.8m more liquid assets than total liabilities.

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

It is just as well that Shanghai Milkground Food Tech's load is not too heavy, because its EBIT was down 24% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Milkground Food Tech 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, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai Milkground Food Tech 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. During the last three years, Shanghai Milkground Food Tech burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Milkground Food Tech has CN¥1.16b in net cash and a decent-looking balance sheet. So while Shanghai Milkground Food Tech does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shanghai Milkground Food Tech .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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