These 4 Measures Indicate That Shanghai Bolex Food Technology (SHSE:603170) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shanghai Bolex Food Technology Co., Ltd. (SHSE:603170) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. 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 Bolex Food Technology

How Much Debt Does Shanghai Bolex Food Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Shanghai Bolex Food Technology had CN¥32.7m of debt in September 2023, down from CN¥35.8m, one year before. However, it does have CN¥426.3m in cash offsetting this, leading to net cash of CN¥393.6m.

How Healthy Is Shanghai Bolex Food Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Bolex Food Technology had liabilities of CN¥373.1m due within 12 months and liabilities of CN¥55.9m due beyond that. On the other hand, it had cash of CN¥426.3m and CN¥301.9m worth of receivables due within a year. So it actually has CN¥299.2m 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.

Also good is that Shanghai Bolex Food Technology grew its EBIT at 12% over the last year, further increasing its ability to manage debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shanghai Bolex Food Technology 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. In the last three years, Shanghai Bolex Food Technology's free cash flow amounted to 29% of its EBIT, less 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¥393.6m, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So we are not troubled with Shanghai Bolex Food Technology's debt use. 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. We've identified 2 warning signs with Shanghai Bolex Food Technology (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.