Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Gansu Shangfeng Cement Co.,Ltd (SZSE:000672) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Gansu Shangfeng CementLtd

What Is Gansu Shangfeng CementLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Gansu Shangfeng CementLtd had CN¥4.55b of debt, an increase on CN¥3.00b, over one year. However, its balance sheet shows it holds CN¥5.98b in cash, so it actually has CN¥1.43b net cash.

A Look At Gansu Shangfeng CementLtd's Liabilities

According to the last reported balance sheet, Gansu Shangfeng CementLtd had liabilities of CN¥5.72b due within 12 months, and liabilities of CN¥3.88b due beyond 12 months. On the other hand, it had cash of CN¥5.98b and CN¥1.17b worth of receivables due within a year. So its liabilities total CN¥2.45b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Gansu Shangfeng CementLtd is worth CN¥7.33b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Gansu Shangfeng CementLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Gansu Shangfeng CementLtd if management cannot prevent a repeat of the 54% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Gansu Shangfeng CementLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Gansu Shangfeng CementLtd 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, Gansu Shangfeng CementLtd's free cash flow amounted to 38% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Gansu Shangfeng CementLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.43b. So while Gansu Shangfeng CementLtd does not have a great balance sheet, it's certainly not too bad. 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 be aware of the 2 warning signs we've spotted with Gansu Shangfeng CementLtd .

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.