Shanshan Brand Management (HKG:1749) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Shanshan Brand Management Co., Ltd. (HKG:1749) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Shanshan Brand Management

What Is Shanshan Brand Management's Debt?

The image below, which you can click on for greater detail, shows that Shanshan Brand Management had debt of CN¥135.0m at the end of December 2023, a reduction from CN¥157.5m over a year. However, it does have CN¥143.5m in cash offsetting this, leading to net cash of CN¥8.48m.

How Healthy Is Shanshan Brand Management's Balance Sheet?

We can see from the most recent balance sheet that Shanshan Brand Management had liabilities of CN¥450.9m falling due within a year, and liabilities of CN¥21.7m due beyond that. Offsetting these obligations, it had cash of CN¥143.5m as well as receivables valued at CN¥223.7m due within 12 months. So it has liabilities totalling CN¥105.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥110.4m, so it does suggest shareholders should keep an eye on Shanshan Brand Management's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Shanshan Brand Management boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Shanshan Brand Management grew its EBIT by 145% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shanshan Brand Management 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 company can only pay off debt with cold hard cash, not accounting profits. Shanshan Brand Management 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 three years, Shanshan Brand Management actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Shanshan Brand Management does have more liabilities than liquid assets, it also has net cash of CN¥8.48m. And it impressed us with free cash flow of CN¥78m, being 164% of its EBIT. So we are not troubled with Shanshan Brand Management's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Shanshan Brand Management has 3 warning signs we think you should be aware of.

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