Here's Why Shanghai Awinic TechnologyLtd (SHSE:688798) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Awinic Technology Co.,Ltd. (SHSE:688798) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai Awinic TechnologyLtd

What Is Shanghai Awinic TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Awinic TechnologyLtd had CN¥597.7m of debt in September 2024, down from CN¥666.7m, one year before. But on the other hand it also has CN¥2.45b in cash, leading to a CN¥1.86b net cash position.

A Look At Shanghai Awinic TechnologyLtd's Liabilities

According to the last reported balance sheet, Shanghai Awinic TechnologyLtd had liabilities of CN¥911.4m due within 12 months, and liabilities of CN¥163.7m due beyond 12 months. Offsetting this, it had CN¥2.45b in cash and CN¥80.2m in receivables that were due within 12 months. So it actually has CN¥1.46b more liquid assets than total liabilities.

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

Although Shanghai Awinic TechnologyLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥244m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shanghai Awinic TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shanghai Awinic TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Shanghai Awinic TechnologyLtd reported free cash flow worth 5.7% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Awinic TechnologyLtd has net cash of CN¥1.86b, as well as more liquid assets than liabilities. So we are not troubled with Shanghai Awinic TechnologyLtd'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. For instance, we've identified 2 warning signs for Shanghai Awinic TechnologyLtd that you should be aware of.

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.