Is Shanghai Stonehill Technology (SZSE:002195) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Shanghai Stonehill Technology Co., Ltd. (SZSE:002195) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shanghai Stonehill Technology

What Is Shanghai Stonehill Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Stonehill Technology had CN¥12.0m of debt in September 2024, down from CN¥47.0m, one year before. But on the other hand it also has CN¥6.26b in cash, leading to a CN¥6.25b net cash position.

How Healthy Is Shanghai Stonehill Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Stonehill Technology had liabilities of CN¥227.9m due within 12 months and liabilities of CN¥56.3m due beyond that. Offsetting these obligations, it had cash of CN¥6.26b as well as receivables valued at CN¥267.3m due within 12 months. So it actually has CN¥6.25b more liquid assets than total liabilities.

This surplus liquidity suggests that Shanghai Stonehill Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Shanghai Stonehill Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Stonehill Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shanghai Stonehill Technology reported revenue of CN¥617m, which is a gain of 4.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Shanghai Stonehill Technology?

Although Shanghai Stonehill Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥45m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shanghai Stonehill Technology is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.