These 4 Measures Indicate That Shanghai Qingpu Fire-Fighting Equipment (HKG:8115) Is Using Debt Safely

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 Qingpu Fire-Fighting Equipment Co., Ltd. (HKG:8115) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shanghai Qingpu Fire-Fighting Equipment

What Is Shanghai Qingpu Fire-Fighting Equipment's Net Debt?

As you can see below, Shanghai Qingpu Fire-Fighting Equipment had CN¥10.5m of debt at December 2021, down from CN¥13.5m a year prior. But it also has CN¥121.0m in cash to offset that, meaning it has CN¥110.5m net cash.

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

Zooming in on the latest balance sheet data, we can see that Shanghai Qingpu Fire-Fighting Equipment had liabilities of CN¥12.6m due within 12 months and liabilities of CN¥19.3m due beyond that. Offsetting these obligations, it had cash of CN¥121.0m as well as receivables valued at CN¥7.90m due within 12 months. So it actually has CN¥97.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Shanghai Qingpu Fire-Fighting Equipment'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 Qingpu Fire-Fighting Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Shanghai Qingpu Fire-Fighting Equipment grew its EBIT by 139% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai Qingpu Fire-Fighting Equipment will need earnings to service that debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shanghai Qingpu Fire-Fighting Equipment has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Shanghai Qingpu Fire-Fighting Equipment recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Shanghai Qingpu Fire-Fighting Equipment has CN¥110.5m in net cash and a strong balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in CN¥9.5m. At the end of the day we're not concerned about Shanghai Qingpu Fire-Fighting Equipment's debt. 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. For example - Shanghai Qingpu Fire-Fighting Equipment has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.