Does Shandong Xiantan (SZSE:002746) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 can see that Shandong Xiantan Co., Ltd. (SZSE:002746) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

Check out our latest analysis for Shandong Xiantan

How Much Debt Does Shandong Xiantan Carry?

As you can see below, at the end of March 2024, Shandong Xiantan had CN¥956.2m of debt, up from CN¥505.4m a year ago. Click the image for more detail. But it also has CN¥3.46b in cash to offset that, meaning it has CN¥2.51b net cash.

A Look At Shandong Xiantan's Liabilities

Zooming in on the latest balance sheet data, we can see that Shandong Xiantan had liabilities of CN¥1.88b due within 12 months and liabilities of CN¥181.9m due beyond that. Offsetting these obligations, it had cash of CN¥3.46b as well as receivables valued at CN¥139.0m due within 12 months. So it can boast CN¥1.54b more liquid assets than total liabilities.

This excess liquidity suggests that Shandong Xiantan is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shandong Xiantan has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Shandong Xiantan's saving grace is its low debt levels, because its EBIT has tanked 90% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shandong Xiantan 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. Shandong Xiantan 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. During the last two years, Shandong Xiantan 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 it is always sensible to investigate a company's debt, in this case Shandong Xiantan has CN¥2.51b in net cash and a decent-looking balance sheet. So we are not troubled with Shandong Xiantan's debt use. 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 instance, we've identified 3 warning signs for Shandong Xiantan (1 is potentially serious) you should be aware of.

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.

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.