Is Shanghai New Huang Pu Industrial Group (SHSE:600638) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Shanghai New Huang Pu Industrial Group Co., Ltd. (SHSE:600638) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shanghai New Huang Pu Industrial Group

What Is Shanghai New Huang Pu Industrial Group's Net Debt?

As you can see below, Shanghai New Huang Pu Industrial Group had CN¥2.89b of debt at September 2024, down from CN¥3.58b a year prior. However, its balance sheet shows it holds CN¥4.87b in cash, so it actually has CN¥1.98b net cash.

How Healthy Is Shanghai New Huang Pu Industrial Group's Balance Sheet?

The latest balance sheet data shows that Shanghai New Huang Pu Industrial Group had liabilities of CN¥10.7b due within a year, and liabilities of CN¥4.46b falling due after that. On the other hand, it had cash of CN¥4.87b and CN¥285.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥10.0b.

The deficiency here weighs heavily on the CN¥3.84b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Shanghai New Huang Pu Industrial Group would probably need a major re-capitalization if its creditors were to demand repayment. Shanghai New Huang Pu Industrial Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

It is well worth noting that Shanghai New Huang Pu Industrial Group's EBIT shot up like bamboo after rain, gaining 46% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanghai New Huang Pu Industrial 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, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai New Huang Pu Industrial 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. Over the last three years, Shanghai New Huang Pu Industrial Group 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

Although Shanghai New Huang Pu Industrial Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.98b. And it impressed us with free cash flow of -CN¥406m, being 757% of its EBIT. So we are not troubled with Shanghai New Huang Pu Industrial Group's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shanghai New Huang Pu Industrial Group's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.