Does Shenzhen Nanshan Power (SZSE:000037) Have A Healthy Balance Sheet?

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.' 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. Importantly, Shenzhen Nanshan Power Co., Ltd. (SZSE:000037) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shenzhen Nanshan Power

What Is Shenzhen Nanshan Power's Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Nanshan Power had debt of CN¥446.2m at the end of March 2024, a reduction from CN¥787.0m over a year. But on the other hand it also has CN¥496.5m in cash, leading to a CN¥50.4m net cash position.

How Healthy Is Shenzhen Nanshan Power's Balance Sheet?

The latest balance sheet data shows that Shenzhen Nanshan Power had liabilities of CN¥448.9m due within a year, and liabilities of CN¥245.2m falling due after that. On the other hand, it had cash of CN¥496.5m and CN¥131.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥66.6m.

Having regard to Shenzhen Nanshan Power's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥3.90b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Shenzhen Nanshan Power 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 Shenzhen Nanshan Power 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.

In the last year Shenzhen Nanshan Power had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥559m. To be frank that doesn't bode well.

So How Risky Is Shenzhen Nanshan Power?

Although Shenzhen Nanshan Power had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥6.2m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 1 warning sign for Shenzhen Nanshan Power you should know about.

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.

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

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.