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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Shanghai Jahwa United Co., Ltd. (SHSE:600315) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Jahwa United

What Is Shanghai Jahwa United's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shanghai Jahwa United had CN¥651.5m of debt, an increase on CN¥531.2m, over one year. But it also has CN¥3.26b in cash to offset that, meaning it has CN¥2.61b net cash.

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¥2.86b falling due within a year, and liabilities of CN¥645.4m due beyond that. Offsetting this, it had CN¥3.26b in cash and CN¥916.8m in receivables that were due within 12 months. So it actually has CN¥679.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Jahwa United could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 44% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Jahwa United's ability to maintain a healthy balance sheet going forward. 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. 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 most recent three years, Shanghai Jahwa United recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Jahwa United has CN¥2.61b in net cash and a decent-looking balance sheet. So we don't have any problem with Shanghai Jahwa United's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Shanghai Jahwa United you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.