Is Shanghai Bairun Investment Holding Group (SZSE:002568) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Bairun Investment Holding Group Co., Ltd. (SZSE:002568) does carry debt. But should shareholders be worried about its use of debt?

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. 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 Bairun Investment Holding Group

What Is Shanghai Bairun Investment Holding Group's Debt?

As you can see below, at the end of September 2023, Shanghai Bairun Investment Holding Group had CN¥2.19b of debt, up from CN¥1.22b a year ago. Click the image for more detail. However, it does have CN¥2.47b in cash offsetting this, leading to net cash of CN¥282.4m.

How Healthy Is Shanghai Bairun Investment Holding Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Bairun Investment Holding Group had liabilities of CN¥2.25b due within 12 months and liabilities of CN¥1.05b due beyond that. Offsetting this, it had CN¥2.47b in cash and CN¥154.8m in receivables that were due within 12 months. So its liabilities total CN¥670.1m more than the combination of its cash and short-term receivables.

Of course, Shanghai Bairun Investment Holding Group has a market capitalization of CN¥20.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Shanghai Bairun Investment Holding Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Shanghai Bairun Investment Holding Group grew its EBIT by 128% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shanghai Bairun Investment Holding Group'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 company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Bairun Investment Holding Group 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 Bairun Investment Holding Group's free cash flow amounted to 22% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Shanghai Bairun Investment Holding Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥282.4m. And it impressed us with its EBIT growth of 128% over the last year. So is Shanghai Bairun Investment Holding Group's debt a risk? It doesn't seem so to us. 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 Bairun Investment Holding Group 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.