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.' 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 Research Institute of Building Sciences Group Co., Ltd. (SHSE:603153) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
What Is Shanghai Research Institute of Building Sciences Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Shanghai Research Institute of Building Sciences Group had CN¥11.9m of debt in March 2024, down from CN¥13.4m, one year before. But on the other hand it also has CN¥1.65b in cash, leading to a CN¥1.63b net cash position.
How Healthy Is Shanghai Research Institute of Building Sciences Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shanghai Research Institute of Building Sciences Group had liabilities of CN¥733.8m due within 12 months and liabilities of CN¥108.6m due beyond that. Offsetting this, it had CN¥1.65b in cash and CN¥1.33b in receivables that were due within 12 months. So it actually has CN¥2.13b more liquid assets than total liabilities.
It's good to see that Shanghai Research Institute of Building Sciences Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shanghai Research Institute of Building Sciences Group boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Shanghai Research Institute of Building Sciences Group grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Research Institute of Building Sciences 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shanghai Research Institute of Building Sciences 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. Looking at the most recent three years, Shanghai Research Institute of Building Sciences Group recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While it is always sensible to investigate a company's debt, in this case Shanghai Research Institute of Building Sciences Group has CN¥1.63b in net cash and a decent-looking balance sheet. And we liked the look of last year's 57% year-on-year EBIT growth. So we don't think Shanghai Research Institute of Building Sciences Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shanghai Research Institute of Building Sciences Group that you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.