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. We note that Shanghai Foreign Service Holding Group Co., Ltd. (SHSE:600662) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Shanghai Foreign Service Holding Group Carry?

You can click the graphic below for the historical numbers, but it shows that Shanghai Foreign Service Holding Group had CN¥735.0m of debt in March 2024, down from CN¥1.01b, one year before. But on the other hand it also has CN¥8.97b in cash, leading to a CN¥8.23b net cash position.

How Strong Is Shanghai Foreign Service Holding Group's Balance Sheet?

The latest balance sheet data shows that Shanghai Foreign Service Holding Group had liabilities of CN¥10.6b due within a year, and liabilities of CN¥117.8m falling due after that. Offsetting these obligations, it had cash of CN¥8.97b as well as receivables valued at CN¥3.16b due within 12 months. So it actually has CN¥1.39b more liquid assets than total liabilities.

This surplus suggests that Shanghai Foreign Service Holding Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shanghai Foreign Service Holding Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Shanghai Foreign Service Holding Group grew its EBIT by 8.5% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shanghai Foreign Service Holding Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai Foreign Service Holding Group 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 most recent three years, Shanghai Foreign Service Holding Group recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Foreign Service Holding Group has net cash of CN¥8.23b, as well as more liquid assets than liabilities. So is Shanghai Foreign Service Holding Group's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Shanghai Foreign Service Holding Group that you should be aware of.

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.