Does Shanghai Bolex Food Technology (SHSE:603170) 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.' 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 note that Shanghai Bolex Food Technology Co., Ltd. (SHSE:603170) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for Shanghai Bolex Food Technology

How Much Debt Does Shanghai Bolex Food Technology Carry?

As you can see below, at the end of September 2024, Shanghai Bolex Food Technology had CN¥180.0m of debt, up from CN¥32.7m a year ago. Click the image for more detail. But on the other hand it also has CN¥667.4m in cash, leading to a CN¥487.4m net cash position.

A Look At Shanghai Bolex Food Technology's Liabilities

We can see from the most recent balance sheet that Shanghai Bolex Food Technology had liabilities of CN¥566.6m falling due within a year, and liabilities of CN¥80.3m due beyond that. Offsetting this, it had CN¥667.4m in cash and CN¥334.1m in receivables that were due within 12 months. So it can boast CN¥354.6m more liquid assets than total liabilities.

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

But the bad news is that Shanghai Bolex Food Technology has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shanghai Bolex Food Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanghai Bolex Food Technology 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. Looking at the most recent three years, Shanghai Bolex Food Technology recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Bolex Food Technology has net cash of CN¥487.4m, as well as more liquid assets than liabilities. So we don't have any problem with Shanghai Bolex Food Technology's use of debt. 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. For example, we've discovered 1 warning sign for Shanghai Bolex Food Technology that you should be aware of before investing here.

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.