Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Shanghai Bright Meat Group Co., Ltd. (SHSE:600073) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shanghai Bright Meat Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shanghai Bright Meat Group had CN¥3.53b of debt, an increase on CN¥3.06b, over one year. However, it does have CN¥3.34b in cash offsetting this, leading to net debt of about CN¥183.4m.

How Strong Is Shanghai Bright Meat Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Bright Meat Group had liabilities of CN¥7.78b due within 12 months and liabilities of CN¥697.3m due beyond that. Offsetting this, it had CN¥3.34b in cash and CN¥2.12b in receivables that were due within 12 months. So its liabilities total CN¥3.01b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shanghai Bright Meat Group is worth CN¥5.21b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Bright Meat 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.

In the last year Shanghai Bright Meat Group had a loss before interest and tax, and actually shrunk its revenue by 8.1%, to CN¥22b. We would much prefer see growth.

Caveat Emptor

Importantly, Shanghai Bright Meat Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥330m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥219m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Shanghai Bright Meat Group has 3 warning signs (and 1 which can't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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