Does Shanghai Chlor-Alkali Chemical (SHSE:600618) Have A Healthy Balance Sheet?

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. We can see that Shanghai Chlor-Alkali Chemical Co., Ltd. (SHSE:600618) 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shanghai Chlor-Alkali Chemical

How Much Debt Does Shanghai Chlor-Alkali Chemical Carry?

The chart below, which you can click on for greater detail, shows that Shanghai Chlor-Alkali Chemical had CN¥1.55b in debt in March 2024; about the same as the year before. However, it does have CN¥3.43b in cash offsetting this, leading to net cash of CN¥1.88b.

How Healthy Is Shanghai Chlor-Alkali Chemical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Chlor-Alkali Chemical had liabilities of CN¥2.03b due within 12 months and liabilities of CN¥1.40b due beyond that. On the other hand, it had cash of CN¥3.43b and CN¥620.4m worth of receivables due within a year. So it can boast CN¥620.5m more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for Shanghai Chlor-Alkali Chemical if management cannot prevent a repeat of the 29% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanghai Chlor-Alkali Chemical's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanghai Chlor-Alkali Chemical 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 Chlor-Alkali Chemical recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Chlor-Alkali Chemical has net cash of CN¥1.88b, as well as more liquid assets than liabilities. So we are not troubled with Shanghai Chlor-Alkali Chemical's debt use. 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 Shanghai Chlor-Alkali Chemical .

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.

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