Does Shanghai Zijiang Enterprise Group (SHSE:600210) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Zijiang Enterprise Group Co., Ltd. (SHSE:600210) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, 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.

See our latest analysis for Shanghai Zijiang Enterprise Group

What Is Shanghai Zijiang Enterprise Group’s Net Debt?

The image below, which you can click on for greater detail, shows that Shanghai Zijiang Enterprise Group had debt of CN¥3.57b at the end of September 2024, a reduction from CN¥3.85b over a year. However, it also had CN¥2.33b in cash, and so its net debt is CN¥1.25b.

How Healthy Is Shanghai Zijiang Enterprise Group’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Zijiang Enterprise Group had liabilities of CN¥6.68b due within 12 months and liabilities of CN¥1.52b due beyond that. On the other hand, it had cash of CN¥2.33b and CN¥2.10b worth of receivables due within a year. So its liabilities total CN¥3.77b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Shanghai Zijiang Enterprise Group has a market capitalization of CN¥10.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Shanghai Zijiang Enterprise Group has a low net debt to EBITDA ratio of only 0.99. And its EBIT easily covers its interest expense, being 45.5 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. The good news is that Shanghai Zijiang Enterprise Group has increased its EBIT by 6.5% over twelve months, which should ease any concerns about debt repayment. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shanghai Zijiang Enterprise Group’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it’s worth checking how much of that EBIT is backed by free cash flow. During the last three years, Shanghai Zijiang Enterprise Group generated free cash flow amounting to a very robust 81% of its EBIT, more than we’d expect. That positions it well to pay down debt if desirable to do so.

Our View

Shanghai Zijiang Enterprise Group’s interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14’s goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! When we consider the range of factors above, it looks like Shanghai Zijiang Enterprise Group is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. We’ve identified 1 warning sign with Shanghai Zijiang Enterprise Group , and understanding them should be part of your investment process.

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.