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. As with many other companies Hengxin Shambala Culture Co.,Ltd. (SZSE:300081) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
See our latest analysis for Hengxin Shambala CultureLtd
What Is Hengxin Shambala CultureLtd's Debt?
The image below, which you can click on for greater detail, shows that Hengxin Shambala CultureLtd had debt of CN¥101.8m at the end of September 2023, a reduction from CN¥168.9m over a year. But it also has CN¥209.3m in cash to offset that, meaning it has CN¥107.4m net cash.
A Look At Hengxin Shambala CultureLtd's Liabilities
We can see from the most recent balance sheet that Hengxin Shambala CultureLtd had liabilities of CN¥292.4m falling due within a year, and liabilities of CN¥34.4m due beyond that. On the other hand, it had cash of CN¥209.3m and CN¥129.6m worth of receivables due within a year. So it can boast CN¥12.1m more liquid assets than total liabilities.
Having regard to Hengxin Shambala CultureLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.24b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Hengxin Shambala CultureLtd 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 it is Hengxin Shambala CultureLtd'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.
In the last year Hengxin Shambala CultureLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 97%, to CN¥594m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Hengxin Shambala CultureLtd?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Hengxin Shambala CultureLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥161m and booked a CN¥396m accounting loss. Given it only has net cash of CN¥107.4m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Hengxin Shambala CultureLtd may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hengxin Shambala CultureLtd (of which 1 makes us a bit uncomfortable!) you should know about.
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.