Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Shenzhen Worldunion Group Incorporated (SZSE:002285) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Shenzhen Worldunion Group
What Is Shenzhen Worldunion Group's Debt?
As you can see below, Shenzhen Worldunion Group had CN¥366.4m of debt at September 2023, down from CN¥936.6m a year prior. However, it does have CN¥1.67b in cash offsetting this, leading to net cash of CN¥1.30b.
A Look At Shenzhen Worldunion Group's Liabilities
According to the last reported balance sheet, Shenzhen Worldunion Group had liabilities of CN¥2.39b due within 12 months, and liabilities of CN¥114.8m due beyond 12 months. Offsetting this, it had CN¥1.67b in cash and CN¥1.81b in receivables that were due within 12 months. So it can boast CN¥974.1m more liquid assets than total liabilities.
This surplus suggests that Shenzhen Worldunion Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues 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 Shenzhen Worldunion Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Shenzhen Worldunion Group had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥3.6b. 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¥563m. 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. Be aware that Shenzhen Worldunion Group is showing 1 warning sign in our investment analysis , you should know about...
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.