Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Shenzhou International Group Holdings Limited (HKG:2313) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Shenzhou International Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Shenzhou International Group Holdings had CN¥12.1b of debt, an increase on CN¥9.20b, over one year. But it also has CN¥16.9b in cash to offset that, meaning it has CN¥4.77b net cash.

A Look At Shenzhou International Group Holdings' Liabilities

The latest balance sheet data shows that Shenzhou International Group Holdings had liabilities of CN¥13.4b due within a year, and liabilities of CN¥2.36b falling due after that. Offsetting this, it had CN¥16.9b in cash and CN¥5.03b in receivables that were due within 12 months. So it can boast CN¥6.16b more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhou International Group Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhou International Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

While Shenzhou International Group Holdings doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhou International Group Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shenzhou International Group Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Shenzhou International Group Holdings recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhou International Group Holdings has CN¥4.77b in net cash and a decent-looking balance sheet. So we are not troubled with Shenzhou International Group Holdings's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Shenzhou International Group Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.