Shanghai Haixin Group (SHSE:600851) Has A Pretty 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. We can see that Shanghai Haixin Group Co., Ltd. (SHSE:600851) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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.

View our latest analysis for Shanghai Haixin Group

What Is Shanghai Haixin Group's Debt?

As you can see below, at the end of March 2024, Shanghai Haixin Group had CN¥37.0m of debt, up from CN¥27.7m a year ago. Click the image for more detail. But on the other hand it also has CN¥762.8m in cash, leading to a CN¥725.8m net cash position.

A Look At Shanghai Haixin Group's Liabilities

We can see from the most recent balance sheet that Shanghai Haixin Group had liabilities of CN¥337.5m falling due within a year, and liabilities of CN¥429.3m due beyond that. Offsetting this, it had CN¥762.8m in cash and CN¥158.5m in receivables that were due within 12 months. So it actually has CN¥154.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Haixin Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai Haixin Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Shanghai Haixin Group grew its EBIT by 340% last year, which is an impressive improvement. 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 it is Shanghai Haixin 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. Shanghai Haixin Group 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. During the last two years, Shanghai Haixin Group burned a lot of cash. 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 investigate a company's debt, in this case Shanghai Haixin Group has CN¥725.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 340% year-on-year EBIT growth. So we are not troubled with Shanghai Haixin Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shanghai Haixin Group is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.