Is Shandong Nanshan AluminiumLtd (SHSE:600219) Using Too Much Debt?

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. We can see that Shandong Nanshan Aluminium Co.,Ltd. (SHSE:600219) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shandong Nanshan AluminiumLtd

What Is Shandong Nanshan AluminiumLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Shandong Nanshan AluminiumLtd had CN¥5.15b of debt in September 2024, down from CN¥9.39b, one year before. However, its balance sheet shows it holds CN¥24.6b in cash, so it actually has CN¥19.4b net cash.

How Strong Is Shandong Nanshan AluminiumLtd's Balance Sheet?

According to the last reported balance sheet, Shandong Nanshan AluminiumLtd had liabilities of CN¥12.3b due within 12 months, and liabilities of CN¥750.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥24.6b as well as receivables valued at CN¥6.12b due within 12 months. So it can boast CN¥17.7b more liquid assets than total liabilities.

This surplus strongly suggests that Shandong Nanshan AluminiumLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Shandong Nanshan AluminiumLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shandong Nanshan AluminiumLtd has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 Shandong Nanshan AluminiumLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shandong Nanshan AluminiumLtd 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, Shandong Nanshan AluminiumLtd recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shandong Nanshan AluminiumLtd has CN¥19.4b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥3.6b, being 89% of its EBIT. When it comes to Shandong Nanshan AluminiumLtd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 example, we've discovered 2 warning signs for Shandong Nanshan AluminiumLtd that you should be aware of before investing here.

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.