Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Shanghai Qingpu Fire-Fighting Equipment Co., Ltd. (HKG:8115) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shanghai Qingpu Fire-Fighting Equipment

How Much Debt Does Shanghai Qingpu Fire-Fighting Equipment Carry?

As you can see below, at the end of December 2020, Shanghai Qingpu Fire-Fighting Equipment had CN¥12.2m of debt, up from CN¥4.73m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥30.6m in cash, so it actually has CN¥18.4m net cash.

How Healthy Is Shanghai Qingpu Fire-Fighting Equipment's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Qingpu Fire-Fighting Equipment had liabilities of CN¥21.8m falling due within a year, and liabilities of CN¥14.2m due beyond that. Offsetting this, it had CN¥30.6m in cash and CN¥14.0m in receivables that were due within 12 months. So it can boast CN¥8.64m more liquid assets than total liabilities.

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

Although Shanghai Qingpu Fire-Fighting Equipment made a loss at the EBIT level, last year, it was also good to see that it generated CN¥929k in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai Qingpu Fire-Fighting Equipment's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai Qingpu Fire-Fighting Equipment 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 last year, Shanghai Qingpu Fire-Fighting Equipment 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 Qingpu Fire-Fighting Equipment has CN¥18.4m in net cash and a decent-looking balance sheet. So we are not troubled with Shanghai Qingpu Fire-Fighting Equipment's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shanghai Qingpu Fire-Fighting Equipment (of which 1 makes us a bit uncomfortable!) 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.

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