Is Shanghai New World (SHSE:600628) A Risky Investment?

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.' 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 New World Co., Ltd (SHSE:600628) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shanghai New World

What Is Shanghai New World's Debt?

As you can see below, Shanghai New World had CN¥550.4m of debt at September 2024, down from CN¥580.4m a year prior. But it also has CN¥2.00b in cash to offset that, meaning it has CN¥1.45b net cash.

A Look At Shanghai New World's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai New World had liabilities of CN¥1.34b due within 12 months and liabilities of CN¥22.2m due beyond that. Offsetting this, it had CN¥2.00b in cash and CN¥98.1m in receivables that were due within 12 months. So it actually has CN¥736.9m more liquid assets than total liabilities.

This surplus suggests that Shanghai New World has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shanghai New World has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Shanghai New World grew its EBIT by 223% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai New World will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai New World 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 two years, Shanghai New World actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai New World has net cash of CN¥1.45b, as well as more liquid assets than liabilities. The cherry on top was that in converted 169% of that EBIT to free cash flow, bringing in CN¥150m. So is Shanghai New World's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 3 warning signs for Shanghai New World (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.