Warren Buffett famously said, '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 Fortune Techgroup Co., Ltd. (SZSE:300493) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Shanghai Fortune Techgroup's Debt?
The image below, which you can click on for greater detail, shows that Shanghai Fortune Techgroup had debt of CN¥133.3m at the end of March 2024, a reduction from CN¥177.5m over a year. But on the other hand it also has CN¥310.2m in cash, leading to a CN¥176.9m net cash position.
How Healthy Is Shanghai Fortune Techgroup's Balance Sheet?
We can see from the most recent balance sheet that Shanghai Fortune Techgroup had liabilities of CN¥591.0m falling due within a year, and liabilities of CN¥26.8m due beyond that. On the other hand, it had cash of CN¥310.2m and CN¥755.8m worth of receivables due within a year. So it actually has CN¥448.1m more liquid assets than total liabilities.
This short term liquidity is a sign that Shanghai Fortune Techgroup could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Fortune Techgroup boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Shanghai Fortune Techgroup's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Fortune Techgroup 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shanghai Fortune Techgroup 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. During the last three years, Shanghai Fortune Techgroup burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Fortune Techgroup has net cash of CN¥176.9m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Shanghai Fortune Techgroup's balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shanghai Fortune Techgroup's earnings per share history for free.
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.