These 4 Measures Indicate That Shanghai Fortune Techgroup (SZSE:300493) Is Using Debt Extensively

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 Fortune Techgroup Co., Ltd. (SZSE:300493) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. 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 Fortune Techgroup

How Much Debt Does Shanghai Fortune Techgroup Carry?

You can click the graphic below for the historical numbers, but it shows that Shanghai Fortune Techgroup had CN¥133.3m of debt in March 2024, down from CN¥177.5m, one year before. However, its balance sheet shows it holds CN¥310.2m in cash, so it actually has CN¥176.9m net cash.

How Healthy Is Shanghai Fortune Techgroup's Balance Sheet?

According to the last reported balance sheet, Shanghai Fortune Techgroup had liabilities of CN¥591.0m due within 12 months, and liabilities of CN¥26.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥310.2m as well as receivables valued at CN¥755.8m due within 12 months. So it can boast CN¥448.1m more liquid assets than total liabilities.

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

It is just as well that Shanghai Fortune Techgroup's load is not too heavy, because its EBIT was down 30% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shanghai Fortune Techgroup's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Fortune Techgroup 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 three years, Shanghai Fortune Techgroup saw substantial negative free cash flow, in total. 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 Fortune Techgroup has CN¥176.9m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Shanghai Fortune Techgroup's balance sheet. 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 Fortune Techgroup's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com