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.' 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. We can see that Shenzhen Special Economic Zone Real Estate & Properties (Group) Co., Ltd. (SZSE:000029) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Shenzhen Special Economic Zone Real Estate & Properties (Group)'s Net Debt?
The image below, which you can click on for greater detail, shows that at December 2023 Shenzhen Special Economic Zone Real Estate & Properties (Group) had debt of CN¥217.0m, up from CN¥111.5m in one year. But on the other hand it also has CN¥1.75b in cash, leading to a CN¥1.53b net cash position.
How Healthy Is Shenzhen Special Economic Zone Real Estate & Properties (Group)'s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shenzhen Special Economic Zone Real Estate & Properties (Group) had liabilities of CN¥2.53b due within 12 months and liabilities of CN¥182.4m due beyond that. Offsetting this, it had CN¥1.75b in cash and CN¥124.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥834.3m more than its cash and near-term receivables, combined.
Of course, Shenzhen Special Economic Zone Real Estate & Properties (Group) has a market capitalization of CN¥9.27b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Shenzhen Special Economic Zone Real Estate & Properties (Group) boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Special Economic Zone Real Estate & Properties (Group)'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 Shenzhen Special Economic Zone Real Estate & Properties (Group) had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥531m. That's not what we would hope to see.
So How Risky Is Shenzhen Special Economic Zone Real Estate & Properties (Group)?
While Shenzhen Special Economic Zone Real Estate & Properties (Group) lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥1.0b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenzhen Special Economic Zone Real Estate & Properties (Group) 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.