Does Shanghai Pioneer Holding (HKG:1345) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shanghai Pioneer Holding Ltd (HKG:1345) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shanghai Pioneer Holding

What Is Shanghai Pioneer Holding's Debt?

As you can see below, at the end of June 2023, Shanghai Pioneer Holding had CN¥90.0m of debt, up from CN¥70.8m a year ago. Click the image for more detail. But it also has CN¥132.8m in cash to offset that, meaning it has CN¥42.8m net cash.

How Healthy Is Shanghai Pioneer Holding's Balance Sheet?

According to the last reported balance sheet, Shanghai Pioneer Holding had liabilities of CN¥372.8m due within 12 months, and liabilities of CN¥68.7m due beyond 12 months. Offsetting this, it had CN¥132.8m in cash and CN¥550.8m in receivables that were due within 12 months. So it can boast CN¥242.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Pioneer Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Pioneer Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Shanghai Pioneer Holding saw its EBIT decline by 9.7% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 Shanghai Pioneer Holding 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shanghai Pioneer Holding 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. In the last three years, Shanghai Pioneer Holding's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Pioneer Holding has net cash of CN¥42.8m, as well as more liquid assets than liabilities. So we are not troubled with Shanghai Pioneer Holding'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. To that end, you should learn about the 2 warning signs we've spotted with Shanghai Pioneer Holding (including 1 which shouldn't be ignored) .

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.