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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shanghai Phoenix Enterprise (Group) Co., Ltd. (SHSE:600679) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Shanghai Phoenix Enterprise (Group) Carry?
As you can see below, at the end of March 2024, Shanghai Phoenix Enterprise (Group) had CN¥339.9m of debt, up from CN¥146.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥861.6m in cash, leading to a CN¥521.6m net cash position.
How Strong Is Shanghai Phoenix Enterprise (Group)'s Balance Sheet?
The latest balance sheet data shows that Shanghai Phoenix Enterprise (Group) had liabilities of CN¥1.09b due within a year, and liabilities of CN¥119.4m falling due after that. Offsetting this, it had CN¥861.6m in cash and CN¥575.8m in receivables that were due within 12 months. So it can boast CN¥232.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Shanghai Phoenix Enterprise (Group) could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai Phoenix Enterprise (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Shanghai Phoenix Enterprise (Group) has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai Phoenix Enterprise (Group) will need earnings to service that debt. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shanghai Phoenix Enterprise (Group) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Shanghai Phoenix Enterprise (Group)'s free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Phoenix Enterprise (Group) has net cash of CN¥521.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 39% over the last year. So is Shanghai Phoenix Enterprise (Group)'s debt a risk? It doesn't seem so to us. 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 example - Shanghai Phoenix Enterprise (Group) has 1 warning sign we think you should be aware of.
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.