Shanghai Milkground Food Tech (SHSE:600882) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shanghai Milkground Food Tech Co., Ltd (SHSE:600882) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai Milkground Food Tech

How Much Debt Does Shanghai Milkground Food Tech Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Shanghai Milkground Food Tech had debt of CN¥1.74b, up from CN¥1.24b in one year. But on the other hand it also has CN¥2.67b in cash, leading to a CN¥933.7m net cash position.

How Strong Is Shanghai Milkground Food Tech's Balance Sheet?

The latest balance sheet data shows that Shanghai Milkground Food Tech had liabilities of CN¥1.93b due within a year, and liabilities of CN¥927.1m falling due after that. On the other hand, it had cash of CN¥2.67b and CN¥142.2m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Shanghai Milkground Food Tech's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥8.06b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Shanghai Milkground Food Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Shanghai Milkground Food Tech grew its EBIT by 2,625% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Shanghai Milkground Food Tech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 look at a company's total liabilities, it is very reassuring that Shanghai Milkground Food Tech has CN¥933.7m in net cash. And we liked the look of last year's 2,625% year-on-year EBIT growth. So we don't have any problem with Shanghai Milkground Food Tech's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Shanghai Milkground Food Tech, you may well want to click here to check an interactive graph of its earnings per share history.

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.