Is Shanghai General Healthy Information and Technology (SHSE:605186) Using Too Much 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 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. As with many other companies Shanghai General Healthy Information and Technology Co., Ltd. (SHSE:605186) makes use of debt. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shanghai General Healthy Information and Technology

What Is Shanghai General Healthy Information and Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Shanghai General Healthy Information and Technology had debt of CN¥50.0m, up from none in one year. But it also has CN¥266.7m in cash to offset that, meaning it has CN¥216.7m net cash.

A Look At Shanghai General Healthy Information and Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai General Healthy Information and Technology had liabilities of CN¥147.8m due within 12 months and liabilities of CN¥2.24m due beyond that. Offsetting this, it had CN¥266.7m in cash and CN¥400.6m in receivables that were due within 12 months. So it can boast CN¥517.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai General Healthy Information and Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai General Healthy Information and Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Shanghai General Healthy Information and Technology if management cannot prevent a repeat of the 49% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shanghai General Healthy Information and Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanghai General Healthy Information and 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. During the last three years, Shanghai General Healthy Information and Technology 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 we empathize with investors who find debt concerning, you should keep in mind that Shanghai General Healthy Information and Technology has net cash of CN¥216.7m, as well as more liquid assets than liabilities. So we are not troubled with Shanghai General Healthy Information and 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. For example - Shanghai General Healthy Information and Technology has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.