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 Shenzhen Worldunion Group Incorporated (SZSE:002285) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shenzhen Worldunion Group

What Is Shenzhen Worldunion Group's Net Debt?

As you can see below, Shenzhen Worldunion Group had CN¥671.3m of debt at March 2023, down from CN¥1.16b a year prior. However, its balance sheet shows it holds CN¥2.02b in cash, so it actually has CN¥1.35b net cash.

How Strong Is Shenzhen Worldunion Group's Balance Sheet?

According to the last reported balance sheet, Shenzhen Worldunion Group had liabilities of CN¥2.77b due within 12 months, and liabilities of CN¥176.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.02b as well as receivables valued at CN¥2.04b due within 12 months. So it can boast CN¥1.12b more liquid assets than total liabilities.

It's good to see that Shenzhen Worldunion Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Shenzhen Worldunion Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Worldunion Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shenzhen Worldunion Group had a loss before interest and tax, and actually shrunk its revenue by 34%, to CN¥3.8b. That makes us nervous, to say the least.

So How Risky Is Shenzhen Worldunion Group?

While Shenzhen Worldunion Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥643m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 1 warning sign for Shenzhen Worldunion Group you should be aware of.

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.