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.' 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 can see that Shanghai Yanhua Smartech Group Co., Ltd. (SZSE:002178) does use debt in its business. But is this debt a concern to shareholders?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Shanghai Yanhua Smartech Group
What Is Shanghai Yanhua Smartech Group's Net Debt?
The chart below, which you can click on for greater detail, shows that Shanghai Yanhua Smartech Group had CN¥164.8m in debt in September 2023; about the same as the year before. However, it does have CN¥284.2m in cash offsetting this, leading to net cash of CN¥119.4m.
How Healthy Is Shanghai Yanhua Smartech Group's Balance Sheet?
We can see from the most recent balance sheet that Shanghai Yanhua Smartech Group had liabilities of CN¥910.2m falling due within a year, and liabilities of CN¥26.6m due beyond that. Offsetting these obligations, it had cash of CN¥284.2m as well as receivables valued at CN¥698.9m due within 12 months. So it actually has CN¥46.3m more liquid assets than total liabilities.
This state of affairs indicates that Shanghai Yanhua Smartech Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.12b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Shanghai Yanhua Smartech Group 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 it is Shanghai Yanhua Smartech Group'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.
Over 12 months, Shanghai Yanhua Smartech Group reported revenue of CN¥715m, which is a gain of 16%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Shanghai Yanhua Smartech Group?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Shanghai Yanhua Smartech Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥2.3m and booked a CN¥129m accounting loss. With only CN¥119.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Shanghai Yanhua Smartech Group is showing 1 warning sign in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.