Shandong Nanshan AluminiumLtd (SHSE:600219) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Shandong Nanshan Aluminium Co.,Ltd. (SHSE:600219) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shandong Nanshan AluminiumLtd

How Much Debt Does Shandong Nanshan AluminiumLtd Carry?

As you can see below, Shandong Nanshan AluminiumLtd had CN¥6.75b of debt at March 2024, down from CN¥7.91b a year prior. However, it does have CN¥26.4b in cash offsetting this, leading to net cash of CN¥19.7b.

How Healthy Is Shandong Nanshan AluminiumLtd's Balance Sheet?

We can see from the most recent balance sheet that Shandong Nanshan AluminiumLtd had liabilities of CN¥14.6b falling due within a year, and liabilities of CN¥581.6m due beyond that. Offsetting this, it had CN¥26.4b in cash and CN¥5.89b in receivables that were due within 12 months. So it can boast CN¥17.1b 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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.

On the other hand, Shandong Nanshan AluminiumLtd saw its EBIT drop by 9.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shandong Nanshan AluminiumLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Shandong Nanshan AluminiumLtd generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shandong Nanshan AluminiumLtd has CN¥19.7b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in CN¥2.7b. So we don't think Shandong Nanshan AluminiumLtd's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Shandong Nanshan AluminiumLtd .

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.

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