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 Jahwa United Co., Ltd. (SHSE:600315) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Shanghai Jahwa United's Debt?
As you can see below, Shanghai Jahwa United had CN¥531.2m of debt at September 2023, down from CN¥711.4m a year prior. But it also has CN¥3.49b in cash to offset that, meaning it has CN¥2.95b net cash.
A Look At Shanghai Jahwa United's Liabilities
According to the last reported balance sheet, Shanghai Jahwa United had liabilities of CN¥3.29b due within 12 months, and liabilities of CN¥1.18b due beyond 12 months. On the other hand, it had cash of CN¥3.49b and CN¥1.26b worth of receivables due within a year. So it can boast CN¥267.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Shanghai Jahwa United could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Jahwa United boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Shanghai Jahwa United's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Jahwa United can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanghai Jahwa United 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 last three years, Shanghai Jahwa United actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company's debt, in this case Shanghai Jahwa United has CN¥2.95b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -CN¥11m, being 100% of its EBIT. So we don't have any problem with Shanghai Jahwa United's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shanghai Jahwa United that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
