Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Power Automotive Technology Company Limited (SHSE:600841) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shanghai New Power Automotive Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai New Power Automotive Technology had CN¥3.31b of debt in March 2024, down from CN¥4.11b, one year before. But it also has CN¥5.42b in cash to offset that, meaning it has CN¥2.11b net cash.

How Healthy Is Shanghai New Power Automotive Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai New Power Automotive Technology had liabilities of CN¥11.5b due within 12 months and liabilities of CN¥778.9m due beyond that. Offsetting these obligations, it had cash of CN¥5.42b as well as receivables valued at CN¥5.18b due within 12 months. So it has liabilities totalling CN¥1.68b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shanghai New Power Automotive Technology is worth CN¥4.08b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Shanghai New Power Automotive Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai New Power Automotive Technology'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.

Over 12 months, Shanghai New Power Automotive Technology reported revenue of CN¥8.5b, which is a gain of 7.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Shanghai New Power Automotive Technology?

While Shanghai New Power Automotive Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥236m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Shanghai New Power Automotive Technology (at least 1 which is concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com