These 4 Measures Indicate That Shanghai Jahwa United (SHSE:600315) Is Using Debt Safely

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.' 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?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shanghai Jahwa United

How Much Debt Does Shanghai Jahwa United Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Shanghai Jahwa United had debt of CN¥652.8m, up from CN¥476.7m in one year. But on the other hand it also has CN¥3.84b in cash, leading to a CN¥3.19b net cash position.

How Healthy Is Shanghai Jahwa United's Balance Sheet?

The latest balance sheet data shows that Shanghai Jahwa United had liabilities of CN¥3.24b due within a year, and liabilities of CN¥669.5m falling due after that. Offsetting this, it had CN¥3.84b in cash and CN¥1.10b in receivables that were due within 12 months. So it actually has CN¥1.03b 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. Simply put, the fact that Shanghai Jahwa United has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Shanghai Jahwa United saw its EBIT drop by 5.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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'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. Shanghai Jahwa United 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. Over the last three years, Shanghai Jahwa United recorded free cash flow worth a fulsome 89% 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¥3.19b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥118m, being 89% of its EBIT. So is Shanghai Jahwa United'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shanghai Jahwa United you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com