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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shanghai New Huang Pu Industrial Group Co., Ltd. (SHSE:600638) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shanghai New Huang Pu Industrial Group's Net Debt?

As you can see below, Shanghai New Huang Pu Industrial Group had CN¥2.89b of debt at September 2024, down from CN¥3.58b a year prior. However, it does have CN¥4.87b in cash offsetting this, leading to net cash of CN¥1.98b.

A Look At Shanghai New Huang Pu Industrial Group's Liabilities

We can see from the most recent balance sheet that Shanghai New Huang Pu Industrial Group had liabilities of CN¥10.7b falling due within a year, and liabilities of CN¥4.46b due beyond that. On the other hand, it had cash of CN¥4.87b and CN¥285.7m worth of receivables due within a year. So its liabilities total CN¥10.0b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥3.66b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Shanghai New Huang Pu Industrial Group would likely require a major re-capitalisation if it had to pay its creditors today. Given that Shanghai New Huang Pu Industrial Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

It is well worth noting that Shanghai New Huang Pu Industrial Group's EBIT shot up like bamboo after rain, gaining 46% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanghai New Huang Pu Industrial Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shanghai New Huang Pu Industrial 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. Happily for any shareholders, Shanghai New Huang Pu Industrial Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Shanghai New Huang Pu Industrial Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.98b. The cherry on top was that in converted 757% of that EBIT to free cash flow, bringing in -CN¥406m. So we are not troubled with Shanghai New Huang Pu Industrial Group's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Shanghai New Huang Pu Industrial Group, you may well want to click here to check an interactive graph of its earnings per share history.

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.