Does Shanghai Belling (SHSE:600171) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Shanghai Belling Co., Ltd. (SHSE:600171) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Belling

What Is Shanghai Belling's Net Debt?

As you can see below, at the end of June 2024, Shanghai Belling had CN¥12.0m of debt, up from CN¥5.00m a year ago. Click the image for more detail. But it also has CN¥1.42b in cash to offset that, meaning it has CN¥1.41b net cash.

How Healthy Is Shanghai Belling's Balance Sheet?

According to the last reported balance sheet, Shanghai Belling had liabilities of CN¥464.6m due within 12 months, and liabilities of CN¥161.9m due beyond 12 months. Offsetting this, it had CN¥1.42b in cash and CN¥614.6m in receivables that were due within 12 months. So it can boast CN¥1.41b more liquid assets than total liabilities.

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

Also positive, Shanghai Belling grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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 Belling 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shanghai Belling 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 Belling recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Belling has net cash of CN¥1.41b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 27% over the last year. So we don't think Shanghai Belling's use of debt is risky. 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 3 warning signs for Shanghai Belling (of which 2 are significant!) you should know about.

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.