Shanghai Milkground Food Tech (SHSE:600882) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, '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. We note that Shanghai Milkground Food Tech Co., Ltd (SHSE:600882) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

What Is Shanghai Milkground Food Tech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shanghai Milkground Food Tech had CN¥1.76b of debt, an increase on CN¥1.15b, over one year. However, its balance sheet shows it holds CN¥2.82b in cash, so it actually has CN¥1.06b net cash.

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

According to the last reported balance sheet, Shanghai Milkground Food Tech had liabilities of CN¥1.98b due within 12 months, and liabilities of CN¥698.3m due beyond 12 months. Offsetting this, it had CN¥2.82b in cash and CN¥132.2m in receivables that were due within 12 months. So it can boast CN¥268.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Milkground Food Tech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Milkground Food Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shanghai Milkground Food Tech if management cannot prevent a repeat of the 90% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanghai Milkground Food Tech 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. 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 we empathize with investors who find debt concerning, you should keep in mind that Shanghai Milkground Food Tech has net cash of CN¥1.06b, as well as more liquid assets than liabilities. So while Shanghai Milkground Food Tech does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shanghai Milkground Food Tech you should know about.

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.