Health Check: How Prudently Does Shanghai Hile Bio-Technology (SHSE:603718) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shanghai Hile Bio-Technology Co., Ltd. (SHSE:603718) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shanghai Hile Bio-Technology

How Much Debt Does Shanghai Hile Bio-Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Shanghai Hile Bio-Technology had CN¥60.9m of debt in September 2024, down from CN¥313.6m, one year before. However, it does have CN¥221.2m in cash offsetting this, leading to net cash of CN¥160.3m.

A Look At Shanghai Hile Bio-Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai Hile Bio-Technology had liabilities of CN¥371.0m due within 12 months and liabilities of CN¥27.0m due beyond that. On the other hand, it had cash of CN¥221.2m and CN¥197.3m worth of receivables due within a year. So it can boast CN¥20.5m more liquid assets than total liabilities.

This state of affairs indicates that Shanghai Hile Bio-Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.96b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Shanghai Hile Bio-Technology has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shanghai Hile Bio-Technology will need earnings to service that debt. 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.

In the last year Shanghai Hile Bio-Technology's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Shanghai Hile Bio-Technology?

While Shanghai Hile Bio-Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥8.3m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shanghai Hile Bio-Technology 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.