Is Shanghai Fengyuzhu Culture Technology (SHSE:603466) Using Too Much Debt?

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. As with many other companies Shanghai Fengyuzhu Culture Technology Co., Ltd. (SHSE:603466) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shanghai Fengyuzhu Culture Technology

How Much Debt Does Shanghai Fengyuzhu Culture Technology Carry?

The chart below, which you can click on for greater detail, shows that Shanghai Fengyuzhu Culture Technology had CN¥503.0m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds CN¥1.82b in cash, so it actually has CN¥1.31b 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¥1.71b due within a year, and liabilities of CN¥551.5m falling due after that. On the other hand, it had cash of CN¥1.82b and CN¥1.71b worth of receivables due within a year. So it can boast CN¥1.26b 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. Due to its strong net asset position, it is not likely to face issues 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!

Another good sign is that Shanghai Fengyuzhu Culture Technology has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. 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 Shanghai Fengyuzhu Culture Technology 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, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Fengyuzhu Culture Technology 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 Fengyuzhu Culture Technology actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Fengyuzhu Culture Technology has net cash of CN¥1.31b, as well as more liquid assets than liabilities. The cherry on top was that in converted 120% of that EBIT to free cash flow, bringing in -CN¥17m. So is Shanghai Fengyuzhu Culture Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Shanghai Fengyuzhu Culture Technology you should be aware of, and 1 of them doesn't sit too well with us.

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.

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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