Does Shanghai Aladdin Biochemical TechnologyLtd (SHSE:688179) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Shanghai Aladdin Biochemical Technology Co.,Ltd. (SHSE:688179) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shanghai Aladdin Biochemical TechnologyLtd

How Much Debt Does Shanghai Aladdin Biochemical TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Shanghai Aladdin Biochemical TechnologyLtd had debt of CN¥409.6m, up from CN¥337.4m in one year. However, its balance sheet shows it holds CN¥539.1m in cash, so it actually has CN¥129.5m net cash.

A Look At Shanghai Aladdin Biochemical TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Shanghai Aladdin Biochemical TechnologyLtd had liabilities of CN¥209.1m falling due within a year, and liabilities of CN¥407.8m due beyond that. On the other hand, it had cash of CN¥539.1m and CN¥68.1m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Shanghai Aladdin Biochemical TechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.21b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Shanghai Aladdin Biochemical TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Shanghai Aladdin Biochemical TechnologyLtd has boosted its EBIT by 64%, 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 Shanghai Aladdin Biochemical TechnologyLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shanghai Aladdin Biochemical TechnologyLtd 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 Aladdin Biochemical TechnologyLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shanghai Aladdin Biochemical TechnologyLtd has CN¥129.5m in net cash. And it impressed us with its EBIT growth of 64% over the last year. So we don't have any problem with Shanghai Aladdin Biochemical TechnologyLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Shanghai Aladdin Biochemical TechnologyLtd , and understanding them should be part of your investment process.

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.

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

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.