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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Shenzhen Worldunion Group Incorporated (SZSE:002285) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shenzhen Worldunion Group

What Is Shenzhen Worldunion Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Worldunion Group had CN¥508.9m of debt in June 2023, down from CN¥1.03b, one year before. However, its balance sheet shows it holds CN¥2.02b in cash, so it actually has CN¥1.51b 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¥2.73b due within 12 months, and liabilities of CN¥167.0m due beyond 12 months. Offsetting this, it had CN¥2.02b in cash and CN¥2.09b in receivables that were due within 12 months. So it can boast CN¥1.21b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Shenzhen Worldunion Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Worldunion Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Shenzhen Worldunion Group made a loss at the EBIT level, and saw its revenue drop to CN¥3.9b, which is a fall of 26%. That makes us nervous, to say the least.

So How Risky Is Shenzhen Worldunion Group?

Although Shenzhen Worldunion Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥614m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example, we've discovered 1 warning sign for Shenzhen Worldunion Group that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.