These 4 Measures Indicate That Shanghai Zhonggu Logistics (SHSE:603565) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Shanghai Zhonggu Logistics Co., Ltd. (SHSE:603565) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shanghai Zhonggu Logistics

What Is Shanghai Zhonggu Logistics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shanghai Zhonggu Logistics had CN¥7.50b of debt, an increase on CN¥5.56b, over one year. But on the other hand it also has CN¥10.9b in cash, leading to a CN¥3.41b net cash position.

A Look At Shanghai Zhonggu Logistics' Liabilities

According to the last reported balance sheet, Shanghai Zhonggu Logistics had liabilities of CN¥5.54b due within 12 months, and liabilities of CN¥7.45b due beyond 12 months. Offsetting these obligations, it had cash of CN¥10.9b as well as receivables valued at CN¥815.6m due within 12 months. So it has liabilities totalling CN¥1.27b more than its cash and near-term receivables, combined.

Since publicly traded Shanghai Zhonggu Logistics shares are worth a total of CN¥19.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Shanghai Zhonggu Logistics also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Shanghai Zhonggu Logistics's saving grace is its low debt levels, because its EBIT has tanked 59% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai Zhonggu Logistics'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shanghai Zhonggu Logistics 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 most recent three years, Shanghai Zhonggu Logistics recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Shanghai Zhonggu Logistics's liabilities, but we can be reassured by the fact it has has net cash of CN¥3.41b. So we are not troubled with Shanghai Zhonggu Logistics'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. To that end, you should learn about the 3 warning signs we've spotted with Shanghai Zhonggu Logistics (including 2 which make us uncomfortable) .

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.

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