Shanghai Yaohua Pilkington Glass Group (SHSE:600819) Has A Pretty Healthy 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Shanghai Yaohua Pilkington Glass Group Co., Ltd. (SHSE:600819) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

View our latest analysis for Shanghai Yaohua Pilkington Glass Group

What Is Shanghai Yaohua Pilkington Glass Group's Net Debt?

As you can see below, Shanghai Yaohua Pilkington Glass Group had CN¥707.8m of debt at June 2024, down from CN¥934.1m a year prior. However, it does have CN¥1.15b in cash offsetting this, leading to net cash of CN¥438.8m.

How Healthy Is Shanghai Yaohua Pilkington Glass Group's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Yaohua Pilkington Glass Group had liabilities of CN¥2.74b falling due within a year, and liabilities of CN¥682.4m due beyond that. Offsetting this, it had CN¥1.15b in cash and CN¥1.12b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.16b.

This deficit isn't so bad because Shanghai Yaohua Pilkington Glass Group is worth CN¥4.67b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Shanghai Yaohua Pilkington Glass Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Shanghai Yaohua Pilkington Glass Group made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥62m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Yaohua Pilkington Glass Group'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 Yaohua Pilkington Glass Group 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 year, Shanghai Yaohua Pilkington Glass Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Shanghai Yaohua Pilkington Glass Group does have more liabilities than liquid assets, it also has net cash of CN¥438.8m. And it impressed us with free cash flow of CN¥443m, being 713% of its EBIT. So we don't have any problem with Shanghai Yaohua Pilkington Glass Group's use of debt. 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. We've identified 2 warning signs with Shanghai Yaohua Pilkington Glass Group (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.