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.' 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 Belling Co., Ltd. (SHSE:600171) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shanghai Belling's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shanghai Belling had CN¥12.0m of debt, an increase on CN¥5.00m, over one year. But on the other hand it also has CN¥1.42b in cash, leading to a CN¥1.41b net cash position.

How Strong Is Shanghai Belling's Balance Sheet?

The latest balance sheet data shows that Shanghai Belling had liabilities of CN¥464.6m due within a year, and liabilities of CN¥161.9m falling due after that. Offsetting these obligations, it had cash of CN¥1.42b as well as receivables valued at CN¥614.6m due within 12 months. So it actually has CN¥1.41b more liquid assets than total liabilities.

This surplus suggests that Shanghai Belling has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Belling boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Shanghai Belling has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai Belling'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Belling 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. Considering the last three years, Shanghai Belling actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Belling has CN¥1.41b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 27% over the last year. So is Shanghai Belling'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. However, not all investment risk resides within the balance sheet - far from it. For example Shanghai Belling has 3 warning signs (and 2 which are a bit unpleasant) 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.