Does Shanghai Fengyuzhu Culture Technology (SHSE:603466) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. We can see that Shanghai Fengyuzhu Culture Technology Co., Ltd. (SHSE:603466) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai Fengyuzhu Culture Technology

What Is Shanghai Fengyuzhu Culture Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Shanghai Fengyuzhu Culture Technology had debt of CN¥511.7m at the end of September 2024, a reduction from CN¥548.9m over a year. However, its balance sheet shows it holds CN¥1.71b in cash, so it actually has CN¥1.20b net cash.

How Strong Is Shanghai Fengyuzhu Culture Technology's Balance Sheet?

The latest balance sheet data shows that Shanghai Fengyuzhu Culture Technology had liabilities of CN¥1.84b due within a year, and liabilities of CN¥545.6m falling due after that. On the other hand, it had cash of CN¥1.71b and CN¥1.59b worth of receivables due within a year. So it can boast CN¥918.9m more liquid assets than total liabilities.

It's good to see that Shanghai Fengyuzhu Culture Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Shanghai Fengyuzhu Culture Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Fengyuzhu Culture Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shanghai Fengyuzhu Culture Technology had a loss before interest and tax, and actually shrunk its revenue by 35%, to CN¥1.5b. To be frank that doesn't bode well.

So How Risky Is Shanghai Fengyuzhu Culture Technology?

While Shanghai Fengyuzhu Culture Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥17m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example, we've discovered 2 warning signs for Shanghai Fengyuzhu Culture Technology (1 is a bit unpleasant!) 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.