Shanghai Ziyan Foods (SHSE:603057) Could Easily Take On More Debt

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.' 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. Importantly, Shanghai Ziyan Foods Co., Ltd. (SHSE:603057) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shanghai Ziyan Foods

How Much Debt Does Shanghai Ziyan Foods Carry?

As you can see below, at the end of March 2024, Shanghai Ziyan Foods had CN¥199.3m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥1.23b in cash offsetting this, leading to net cash of CN¥1.03b.

How Healthy Is Shanghai Ziyan Foods' Balance Sheet?

The latest balance sheet data shows that Shanghai Ziyan Foods had liabilities of CN¥771.8m due within a year, and liabilities of CN¥187.9m falling due after that. Offsetting these obligations, it had cash of CN¥1.23b as well as receivables valued at CN¥186.3m due within 12 months. So it actually has CN¥457.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Ziyan Foods could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Ziyan Foods 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 Shanghai Ziyan Foods has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. 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 Ziyan Foods 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. Shanghai Ziyan Foods 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. Over the most recent three years, Shanghai Ziyan Foods recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Ziyan Foods has CN¥1.03b in net cash and a decent-looking balance sheet. And we liked the look of last year's 48% year-on-year EBIT growth. So we don't think Shanghai Ziyan Foods's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Shanghai Ziyan Foods (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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