Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Shenzhen Special Economic Zone Real Estate & Properties (Group) Co., Ltd. (SZSE:000029) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Shenzhen Special Economic Zone Real Estate & Properties (Group) Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Special Economic Zone Real Estate & Properties (Group) had debt of CN¥117.0m at the end of September 2024, a reduction from CN¥243.3m over a year. But it also has CN¥1.52b in cash to offset that, meaning it has CN¥1.40b net cash.

How Strong 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¥2.61b due within 12 months and liabilities of CN¥65.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.52b as well as receivables valued at CN¥135.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.02b.

Given Shenzhen Special Economic Zone Real Estate & Properties (Group) has a market capitalization of CN¥13.9b, it's hard to believe these liabilities pose much threat. 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! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Special Economic Zone Real Estate & Properties (Group) will need earnings to service that debt. 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 17%, to CN¥385m. We would much prefer see growth.

So How Risky Is Shenzhen Special Economic Zone Real Estate & Properties (Group)?

Although Shenzhen Special Economic Zone Real Estate & Properties (Group) had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥970m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Shenzhen Special Economic Zone Real Estate & Properties (Group) that you should be aware of before investing here.

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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