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 Shanying International Holdings Co.,Ltd (SHSE:600567) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Shanying International HoldingsLtd
What Is Shanying International HoldingsLtd's Net Debt?
As you can see below, Shanying International HoldingsLtd had CN¥31.1b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥5.17b in cash offsetting this, leading to net debt of about CN¥25.9b.
How Healthy Is Shanying International HoldingsLtd's Balance Sheet?
According to the last reported balance sheet, Shanying International HoldingsLtd had liabilities of CN¥26.4b due within 12 months, and liabilities of CN¥13.0b due beyond 12 months. On the other hand, it had cash of CN¥5.17b and CN¥5.29b worth of receivables due within a year. So it has liabilities totalling CN¥29.0b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CN¥8.42b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Shanying International HoldingsLtd would likely require a major re-capitalisation if it had to pay its creditors today. 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 Shanying International HoldingsLtd'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.
Over 12 months, Shanying International HoldingsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥30b, which is a fall of 13%. We would much prefer see growth.
Caveat Emptor
While Shanying International HoldingsLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥344m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized CN¥477m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Shanying International HoldingsLtd , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.