Shanghai Jahwa United (SHSE:600315) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shanghai Jahwa United Co., Ltd. (SHSE:600315) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shanghai Jahwa United

How Much Debt Does Shanghai Jahwa United Carry?

You can click the graphic below for the historical numbers, but it shows that Shanghai Jahwa United had CN¥598.7m of debt in June 2024, down from CN¥777.2m, one year before. However, it does have CN¥3.85b in cash offsetting this, leading to net cash of CN¥3.26b.

A Look At Shanghai Jahwa United's Liabilities

We can see from the most recent balance sheet that Shanghai Jahwa United had liabilities of CN¥3.40b falling due within a year, and liabilities of CN¥656.2m due beyond that. Offsetting this, it had CN¥3.85b in cash and CN¥1.15b in receivables that were due within 12 months. So it can boast CN¥949.0m more liquid assets than total liabilities.

This surplus suggests that Shanghai Jahwa United has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Jahwa United boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Shanghai Jahwa United's load is not too heavy, because its EBIT was down 32% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Jahwa United'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. While Shanghai Jahwa United 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. Over the last three years, Shanghai Jahwa United recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Jahwa United has net cash of CN¥3.26b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥427m, being 83% of its EBIT. So we don't have any problem with Shanghai Jahwa United's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shanghai Jahwa United's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.