We Think Shanghai Zhonggu Logistics (SHSE:603565) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Shanghai Zhonggu Logistics Co., Ltd. (SHSE:603565) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Shanghai Zhonggu Logistics

What Is Shanghai Zhonggu Logistics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shanghai Zhonggu Logistics had CN¥8.21b of debt, an increase on CN¥6.52b, over one year. But it also has CN¥11.2b in cash to offset that, meaning it has CN¥2.99b net cash.

How Healthy Is Shanghai Zhonggu Logistics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Zhonggu Logistics had liabilities of CN¥6.03b due within 12 months and liabilities of CN¥8.24b due beyond that. On the other hand, it had cash of CN¥11.2b and CN¥726.8m worth of receivables due within a year. So its liabilities total CN¥2.35b more than the combination of its cash and short-term receivables.

Given Shanghai Zhonggu Logistics has a market capitalization of CN¥17.3b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

It is just as well that Shanghai Zhonggu Logistics's load is not too heavy, because its EBIT was down 44% over the last year. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 56% 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

While Shanghai Zhonggu Logistics does have more liabilities than liquid assets, it also has net cash of CN¥2.99b. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shanghai Zhonggu Logistics (of which 1 shouldn't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.